Abstract

In this study, the relationship between economic growth (EG) and financial deepening in Turkey was explored by using the yearly data belongs to the series of GDP, gross fixed capital formation (PC), secondary education (HC) and portfolio investment (FD) for the period between 1994 – 2017. VECM employed to reveal the short-term and the long-term causality. The results of VECM did not indicate a long-term relationship. The short –term analysis revealed that there is (a) a bidirectional causality between economic growth and financial deepening, (b) a unidirectional causality from physical capital to economic growth (c) a bidirectional causality between financial deepening and physical capital (d) a unidirectional causality from human capital to financial deepening. There is not a causality (e) between human capital and economic growth (f) between human capital and physical capital in the short-term. The results of the analyses in this research support the Mutual Interaction Hypothesis that asserts a bidirectional relationship between financial deepening and economic growth, which is hypothesised by Lewis and Patric. In this context, financial deepening has an important place in terms of sustainable economic growth.