Impact of economic growth through financial system in Turkey

The relationship between development in the financial system and economic growth has been considered as an important issue by academicians and practicioners in recent years. From a theoretical perspective, the foundations of this relationship were first examined by Bagehot and Schumpeter and also McKinnon and Shaw have been interested in this topic recently. The financial system is seen as a key factor for the performance of an economy. The financial system is the one of the most important sub-system of an economic layout. The main reason of it is being the center of the fund transfer process which is mostly needed by all economies. Success of the economic system largely depends on the effectiveness of the financial system. On the other hand, economic growth leads to the development at the level of international integration and the increase in the average income level. It also creates the most suitable environment for the development in the financial system. Demand-following and supply-leading hypotheses play an important role to explain the interrelationship between the financial and economic growth progresses. According to supply-leading hypothesis, financial development can be seen as a source of economic growth. Demand-following hypothesis supports the existence of causality from economic growth to financial development. In this thesis, causal relationship between development of financial system and economic growth is examined by using quarterly data from 1998: Q1 to 2018: Q4. Toda-Yamamota method is used to determine the direction of this relationship. Findings show that there is a one-way causality from economic growth to financial development. Thus, these findings present a supporting evidence for the demand-following hypothesis which is conceived by Robinson. Keywords: Financial Development, Economic Growth, Toda-Yamamota Causality Test