An Empirical Causality Analysis of Financial Development and Economic Growth in Turkey

Abstract

This paper examines the relationship between financial development and economic growth using Granger causality tests based on vector error correction models (VECM). In this paper, the competing hypotheses of "demand-following" versus "supply-leading" are empirically tested over the period of 1970-2006. Test results show that there is a bi-directional causality between financial development and economic growth. Furthermore, the results support both demand-following and supply-leading hypothesis for Turkey.