Analyzing the bank credit-economic growth nexus in Turkey

Abstract

This paper investigates the relationship between credit market development and economic growth for Turkey over the period of 1961-2008 using an ARDL-Bounds testing approach. In this study, we attempt to test whether credit market development spurs economic growth taking into account the negative effect of inflation rate as an intermittent variable on credit market and growth. Another aim of this study is to investigate the relationship between bank credit and GDP growth and to estimate the short-run and the long-run elasticities. For this purpose, various classical unit root tests are carried out including ADF, PP and DFGLS as well as Zivot-Andrews unit root test with structural break and an ARDL approach to cointegration analysis is applied to examine whether the variables are cointegrated irrespective of the integration of the variables. It is found that bank credit increases GDP growth both in the short and the long run until 2002 after which the impact is reversed. The impact of inflation on economic growth is negative for the whole period. The empirical results indicate that credit market development has a positive effect on economic growth until the period of the over-financialization in Turkey. In order for the bank credit to play 'supply-leading' role it is necessary to regulate financial markets effectively and efficiently. © EuroJournals, Inc. 2010.