Abstract
This study purpose is to connect the proxy of financial development which is total banking sector’s deposits with the economic growth in North Cyprus. The reason for using the total deposit differently with the existing literature is because North Cyprus is bank-based financial system. Therefore, this study provides an analysis of the connection between finance-growth nexus in North Cyprus from 1978 through 2015, using the autoregressive distributed lag (ARDL) model and combined cointegration to evaluate and verify the relationship. In addition, this research added the inflation rate to the model specification to investigate the inflation-growth interaction. The results revealed that both methods of cointegration provided robust evidence for a long-run relationship between financial debt and growth. The ARDL long-run and short-run coefficients showed the positive impact of depth and the negative impact of inflation on economic growth, thereby confirming the strength of the finance-growth and inflation-growth connections. Moreover, financial depth had a larger coefficient than the inflation rate. Finally, the VECM Granger causality test provided evidence for unidirectional causality from the total deposits and inflation rate to economic growth in North Cyprus. These results are significant for the policymakers of North Cyprus because the findings show that economic growth can be improved by enhancing the deposit rates in the financial system.
Highlights
North Cyprus1 is a small island economy
Model specification and data Collection4 Based on the above empirical study, we provide the model specifications to obtain the impact of financial deepening and the inflation rate on economic growth
Before applying the autoregressive distributed lag (ARDL) bounds test for cointegration and Bayer-Hanck combined cointegration method to verify the long-run relationship between the variables, it is important to determine the order of integration by implementing the unit root test
Summary
North Cyprus is a small island economy. Over a period of 39 years, the banking sector in North Cyprus accumulated vast amount money in bank deposits. None of the previous studies of North Cyprus have included the inflation rate in their modelling and analysis of the finance-growth nexus Another significant contribution of this work is that we used the quadratic match-sum method to convert the annual data to quarterly data to investigate the long-run and short-run relationships between depth, inflation, and growth. Faisal et al (2017a, b) analysed the relationship between economic growth, FDI, stock prices, and financial development Their findings confirmed evidence of a long-run relationship between the estimated variables using the ARDL bounds testing approach. Empirical results As explained previously, in this study the ARDL bounds test for cointegration was applied to investigate the impact of the banks’ deposits and the inflation rate on economic growth in North Cyprus.
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