Financial Development, International Trade and Economic Growth: The Case of Turkey

Abstract

The present study investigates long run equilibrium relationship and cointegration between real income, financial development, and international trade in Turkey. Since trade volume and imports of goods and services are stationary at their levels, these two variables are excluded from further analyses according to the requirements of the Johansen methodology; therefore, international trade is proxied by exports of goods and services in the present study. Johansen cointegration test results suggest a long run relationship between real income and its regressors, namely financial development and international trade. Real income in Turkey converge to its long term equilibrium level significantly at various levels by the contribution of financial sector and international trade, which depends on the selection of financial sector proxy. Finally, Granger causality tests suggest that a change in financial sector preceedes a change in real income, which supports the validity of supply leading hypothesis in Turkey. On the other hand, bidirectional causality (feedback relationship) has been investigated between real income and international trade in Turkey.