Ebook Financial Development and Economic Growth in Turkey: Further Evidence on the Causality Issue
This paper explores the relationship between financial development and economic growth in Turkey. Since the seminal work of Patrick (1966), which first postulated a bi-directional relationship between financial development and economic growth a large empirical literature has emerged testing this hypothesis (see Levine, 1997 for survey). Two trends in this literature can, however, be identified. The first, testing the relationship between economic growth and financial development, frequently adopts a single measure of financial development and tests the hypothesis on a number of countries using either cross section or panel data techniques. (See, for example, Jung (1986), Rubini and Sala-i-Martin (1992), Demetriades and Hussein (1996) and Luintel and Khan (1999)).
The second trend in the empirical literature is to examine the hypothesis for a particular country using time series techniques, as for example, Murinde and Eng, (1996) for Singapore, Lyons and Murinde (1994) for Ghana, Odedokun (1989) for Nigeria, Agung and Ford (1998) for Indonesia and Wood (1998) for Barbados. This paper contributes to this second strand of the literature, which it extends in two directions.
This paper is the first single-country study of the relationship between financial development and economic growth in Turkey, despite over 20 years of financial liberalisation. The methodology used is that of multivariate cointegration and vector error correction models (VECM) following Johnasen (1988) and Johansen and Juselius (1990). The second contribution is to test for the robustness of the causality results by using five alternative proxies for financial development. Given that financial development is difficult to measure, alternative proxies may give rise to different causal relationships.
The use of alternative proxies will therefore enable us to test the robustness of the earlier finding, developed in the multi-country context of Demetriades and Hussein (1996), that economic growth follows financial development in Turkey. Moreover, to the extent that our results show that different measures of financial developoment do give rise to different causal patterns between financial development and economic growth, then the findings of previous studies that use only a single measure of financila development may be subject to measurement bias.
The structure of this paper is as follows. Section 2 reviews the theoretical debate on the nature of the relationship between financial development and economic growth. Section 3 explains the alternative measures of financial development and economic growth in the context of developments in the Turkish economy. Section 4 sets out the econometric methodology and investigates the univariate time series properties of the data. The empirical results are discussed in Section 5 and Section 6 offers a brief conclusion.
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