Researching the impact of industry sector on financial development with panel data analysis

The concept of financial development has been the subject of many theoretical and empirical studies in terms of relation to economic growth. In most of the previous studies, with regard to the results obtained, supply-leading hypothesis, namely, the hypothesis that financial development has important contributions to growth and the real sector has been confirmed. In some analysis, the demand-following hypothesis that economic growth is the source of financial development has been reached. The aim of this study is to analyze the relationship between financial development and economic growth by reducing it to the industry sector which is one of the important elements of growth and to reveal how financial development is affected by industrial sector activities. In panel regression analysis that applied by using the annual data between 1995 and 2012 of OECD member 24 countries, dependent variable domestic credit to private sector (% of GDP) is selected as an indicator of financial development. Independent variables are industrial production index (2015 base year) selected as an indicator of the industry sector, Crisis1 dummy variable generated to represent the 1997 East Asian Financial Crisis and crisis2 dummy variable defined to represent the 2008 global financial crisis. The one-way random effects model with only unit effect was estimated with the Driscoll-Kraay Estimator which produces resistant standard errors after basic assumption tests. According to results of full logarithmic final panel regression model; The increase in the industrial production index also increases the domestic credit to private sector (% of GDP). Moreover, on the dependent variable; it was determined that crisis 1 had negative effects and crisis 2 had positive effects. According to the findings obtained, The increase in activity in the industrial sector paves the way for financial development and this result is compatible with the demand-following hypothesis. The positive impact of the 2008 global crisis was evaluated within the framework of the quantitative easing strategy and the abundance of liquidity provided to the world markets.