Granger Causality between Financial Deepening and International Trade: Evidence from Regional Panel Data

Abstract

Finance-growth nexus has been a prolific research subject whereas research exploring whether there is an interrelationship between financial system and economic growth is somewhat inconclusive (Levine, 2003). Remarkable studies noted that financial system and its level of development are argued to stimulate economic growth whilst some other important figures in academia investigated the opposite link or simply ignored such association. Current research aims to explore aforementioned association with respect to regional financial deepening in Turkey through developing a panel model and exploring causality. The level of total credits and deposits recorded in each province of Turkey in all banks -regardless of state, private or foreign owned- are utilized as measures of local financial deepening. Foreign trade of each province -both imports and exports- is hypothesized to be determined by financial deepening variables as well as a number of control variables. Results using panel data from 2007-2010 (81 province, N: 324) suggest that credits alone do significantly explain the amount of export and import of that particular province. Interestingly, amount of deposits is negatively associated with the level of imports. Combined measure for provision of financial services (sum of loans and deposits) statistically explains foreign trade (sum of exports and imports). Granger causality analysis revealed that there is bi-directional causal relationship between financial deepening and international trade.