Aim of the study is to investigate the relationship between financial development and financial fragility in Turkey. For this purpose, firstly financial development index (FDI) and financial fragility index (FFI) are constructedby using Principal Component Analysis (PCA) for the period of 1990Q1-2014Q4 with quarterly data. These indices are seemed to explain the financial appearance of Turkey. Then, Johansen cointegration test and Augmented Granger Causality test based on Vector Error Correction Model (VECM) are implementedin order to investigate the relationship between two indices. Emprical results show that there is a long-term relationship between indices. Furthermore, it is seemed that the direction of relationship is statistically significant unidirectional causality from FDI to FFI in the short term.
Key words: Financial Development, Financial Fragility, Index, Principal Component Analysis, VECM. JEL Codes: C10, E44, G10. Article Language: EnglishTurkish
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