The relationship between financial development and economic growth in Turkey

THE RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN TURKEY Gülbahar GEDİKOĞLU TAM The financial system has become an important dynamic affecting economic indicators today as a result of the significant transformation it has undergone recently. In fact, the spread of financial liberalization movements and developments in information and communication technologies have enabled financial activities to develop rapidly by enabling them to be carried out both faster and cheaper. In this way, major transformations experienced in the financial system have started to have significant effects especially on economic growth processes. As a result, analyzing the interaction between the financial system and economic growth has become an important research topic. Based on this, the relationship between the financial development process and economic growth in Turkey has been analyzed in our study. The relationship between the level of financial development and economic growth in Turkey was examined using the causality method based on the Vector Error Correction Model over quarterly data from 2003 to the first half of 2023. In this context, four different models were estimated as financial development indicators, addressing the relationship between the changes in the M1 and M2 money supply, banking sector credit volume and stock market turnover rate, which measure monetary deepening, and economic growth. In all models, a causal relationship was found from financial development indicators to economic growth in both the short and long term. No causal relationship was found from economic growth to financial development. Thus, the findings obtained regarding the relationship between financial development and economic growth in Turkey are in strong agreement with the "Supply Lead Hypothesis". In terms of policy implications, in order to achieve high growth rates in Turkey continuously, special importance should be given to the management of M1 and M2 money supply amounts in the context of effectively directing the monetization process. In addition, it is of great importance to design and implement policies separately to strengthen the banking sector and the stock market in order to achieve sustainable high growth rates in Turkey. Thus, the findings obtained from the study show that policies towards the financial system in Turkey should become an important part of the policy design aiming at economic growth. Keywords: Financial Development, Economic Growth, Turkey