Abstract

This paper examines the effects of developments in the financial sector upon real sector growth based on data from 2003 to 2011 in Turkey. During this period, following a severe banking crisis, banks changed their operating model from channeling funds to finance government debt to increasing and maintaining their loan portfolio to business entities and real persons. Moreover, strict regulations were imposed by the newly established banking regulation authority. The results of the study are in line with existing growth literature that argues that financial deepening is positively related with growth. In addition, we find that sector-based non-performing loans are negatively related to real sector growth, whereas net interest margins are positively related to it. These results are also in line with expectations.

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