Abstract

The goal of this study is to investigate the non-linear dynamics of financial development on trade balance in Turkey. For the period of 1987Q1-2015Q2, by employing nonlinear autoregressive distributed lag (NARDL) approach to cointegration, it is found that there is cointegration between these variables. This finding suggests that both increase and decrease in financial development have different impacts on trade balance. The relationship between financial development and trade balance has also negative sign. This finding asserts that an improvement in financial development will cause a significant deterioration in trade balance while opposite is also true but with less impact. The results of the study support the empirical literature which has identified the relationship between financial development and growth as being highly correlated. But it does not support using financial development as a policy tool to reduce trade balance.

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