The Effect of Financial Development on Economic Growth: Analysis of the Turkish Economy with the Toda-Yamamoto Approach

Abstract

Purpose - The aim of the study is to determine the interaction between financial development and economic growth of Turkey, which is one of the developing countries, and to propose policy recommendations for this. Design/methodology/approach - In the study, causality relationship between the financial development index, financial institution development index, financial market development index, and economic growth published by IMF between the years 1980-2020 was examined by Toda-Yamamoto analysis. It is thought that the study will contribute to literature by considering the effects of institutions, markets, and entire financial system on growth separately. Findings - As a result of the analysis, it has been determined that the financial development index and the financial institution development index are in a bilateral causality relationship with growth, and also a unilateral causality relationship from economic growth to the development of financial markets. It has been observed that there is a bilateral causality relationship with growth, which are control variables, domestic savings, foreign direct investments, inflation, economic added value, and trade. Discussion - Considering the data obtained as a result of the application, it is seen that financial development and economic growth affect each other and act together in Turkey. Therefore, for sustainable economic growth, financial development must be ensured, especially by strengthening financial institutions, diversifying financial instruments, and establishing an accessible and controlled system.