The causality between financial development and economic growth: The case of turkey

In this study, we investigate the causal relationship between financial development and economic growth in Turkey for the 1987:1-2012:4 period. We use eight series to indicate financial development and employ Johansen’s (1991) Cointegration Approach, Pesaran’s (2001) Bounds Testing and Granger Causality Tests. The test results suggest that long-run relationships exist between economic growth and all financial development indicators. Moreover, our findings support both supply leading and demand following hypotheses. The direction of the short-run and long-run causal relationship between economic growth and financial development depends on which financial development indicator is used. Particularly, improvements in financial development indicators related to the resource allocation function of the financial system lead to economic growth whereas economic growth causes financial development through increasing banks’ assets in the long run.