The relationship between financial stability and the real economy: Example of Turkey

Monthly and quarterly financial stability indices representing financial stability are formed by different methodologies at the study. The relationship between the aggregate financial stability index and the real economy are evaluated for the period of 2004Q1-2017Q4. It is seen that real economic stability has been positively affected by financial stability at the related period. The causality between the sub-items of aggregate financial stability and the variables representing the real economy are discussed. The current account balance, the cash credits per deposit, and the regulatory capital per the risk-weighted assets are the most sensitive items for the relationship. The relationship between CAMELS items and real economy is discussed with respect to banking stability. Capital and liquidity items are the most sensitive items over the real economy. Then, the relationship between the monthly financial stability index and the industrial production index is evaluated for the period of 2003M1-2017M12. Financial stability has been positively impacted by industrial production in the long run. It is seen that financial instability leads to real economic instability with powerful evidence at the relevant period. The causality between monthly financial stability sub-items and industrial production is discussed. Sub-items of intermediary function are the most sensitive components on industrial production.