The Relationship between Money, Inflation, Banking Sector Development and Economic Growth: Case Study of the Republic of Turkey

This research applied the four steps test model to investigate the relationship between money (M2), inflation (ICP) and banking sector development (DC) on economic growth (GDP) using Turkey as a case study. The annual data from 1960-2014 was extracted from the World Bank Development Indicator and used for the purpose of this empirical analysis. The unit root test of ADF and PP show that all of the variables are integrated order of I(1). The Johansen co-integration test shows that there exist cointegration between the variables and the vector error correction test show that there is along-run and short-run relationship between the variables. The Granger causality test indicates that there is a bi-directional relationship between economic growth (GDP) and money (M2), a unit directional relationship from banking sector development (DC) to economic growth (GDP) and a unidirectional relationship from inflation (ICP) to banking sector development (DC). However, we found no relationship between inflation (ICP) and economic growth (GDP).