Financial Development and Economic Growth: The Case of Turkey and Romania

Abstract

In this study, the role of inflation threshold effect in the relationship between financial development and economic growth has been investigated for Turkey and Romania in period 1999:Q1 -2015:Q1 and 2002:Q4 -2015Q2 respectively. At the first stage, inflation threshold value has been detected and after that financial development-economic growth relation has been examined for both countries using threshold autoregressive (TAR) model. Results indicate that there is one threshold value in Turkey, whereas there are two in Romania. Previous studies support that financial development may promote economic growth. However, the findings of this study suggest that it can only be achieved under low and moderate inflation. In addition, under the first regime which is below the threshold level, financial development significantly promotes growth. Threshold value is estimated at 9.83 % for Turkey and 6.69 % for Romania. In this regard, it is important to achieve sustainable growth which plays a crucial role in increasing the efficiency of implemented monetary policies and assuring stability. Therefore, political and economic decision-makers in these economies do not ignore the concept of threshold within the scope of monetary policy while determining the target inflation rate in their efforts to deal with inflation.