Empirical analysis of the relationship between financial development and economic growth: The case of Turkey

The relationship between financial development and economic growth has long been explored and debated in the literature. At the same time, there are disagreements about how they affect each other. In this study, the relationship between financial development and economic growth was analyzed empirically for the Turkish economy. In the analysis of study, the data which the M3 money supply, private sector credit to GDP ratio, private sector credit to domestic credit and domestic credit to GDP ratio were used for 2005:4-2019:1 quarter period of Turkish economy. The cointegration relationship between variables was tested through the bound test developed by Pesaran, Shin and Smith (2001), and the short and long term relationships between variables were tested through the Autoregressive Distributed Lag (ARDL) model. In the last part of the analysis, the causality relationship of the variables was determined by applying Toda-Yamamoto causality analysis. According to the results of the empirical analysis, it was determined that there is a cointegration relationship between financial development and economic growth. According to ARDL model results, the relationship between financial development variables and economic growth is statistically significant and positive in the short and long term. According to the causality analysis results, it was determined, M3 money supply and the ratio of private sector credit to domestic credit have a one-way causality relationship to economic growth and the data that private sector credit to GDP ratio and domestic credit to economic growth has a bidirectional causal relationship to economic growth.