FINANCIAL INTERMEDIATION AND ECONOMIC GROWTH: A CGE MODEL FOR TURKEY

Gökhan KARABULUT (İstanbul University)
Dündar Murat DEMİRÖZ (İstanbul University)

The aim of this paper is to analyze the relationship between financial development and economic growth. In growth literature, it is indicated that financial intermediation has a positive impact on economic growth. On the other hand, there are multiple number of studies, which claim that credit booms are important indicators of financial crises and economic downturns. Therefore searching for the structure of the preclaimed causal relationship between financial intermediation and growth will help to design effective policies for obtaining a stable growth path. In order for economic modeling, a CGE model, which includes a representative household, a representative firm and a representative bank, is constructed. Since financial intermediaries in Turkey are mostly banks, it is intended in the paper to present the rate of improvement in financial intermediation by the growth of total private credit volume. Following the calibration results of the model, which includes variance decompositions and impulse response functions, an empirical estimation of the relationship between financial intermediation and growth using the causality tests and VAR methodology is presented. The paper concludes with a brief summary of the theoretical and emprical findings.