Analysis of Determinants of Credit Growth with Time-Varying Causality Test in Turkey

Although credit growth has been the main driver of financial development and economic growth in recent years, the factors affecting credit growth cannot be said to be sufficiently understood. This study examines which economic factors determine credit growth, which is an important part of the financial system in Turkey. Econometric estimates for the 2006Q1-2019Q4 period are based on Toda and Yamamoto (1995) and Hacker and Hatemi-J (2006) causality tests. However, our approach takes into account the time-varying causality. In addition to the variables related to the banking sector, the variables representing the country's macro-economic and monetary policy conditions, and foreign demand and global liquidity conditions are examined as determinants of credit growth. It is determined that GDP growth rate and inflation rate, which are among macroeconomic variables, lead credit growth, but less frequently causality relationship is from public debt to credit growth. Regarding monetary policy, causality from money supply to credit growth is more uncertain than Central Bank of the Republic of Turkey (CBRT) interest rates. Similarly, periodic causality relationships are observed from the variables of US federal funds, capital inflows, and exchange rates, which represent foreign demand and global liquidity conditions, to credit growth. These findings clearly show that causal relationships between credit growth and its determinants are time-varying. Therefore, it is revealed that policies towards the stability of credit growth require a dynamic design.