Credit decomposition and economic activity in Turkey: A wavelet-based approach

Abstract

This paper aims to investigate the co-movement between the credit growth and gross domestic product (GDP) growth in Turkey over the period January 2004–October 2019. By taking into account alternative credit decomposition and the variations over time and across frequencies using the wavelet analysis, the results show that: i) GDP growth highly synchronizes with credit growth compared to other financial variables such as stock exchange, bonds, and exchange rate. ii) There is a high correlation between commercial loan growth and capital formation and a relatively weak one with consumer loans and consumption. iii) Co-movement stemming from Turkish Lira (TL) credits to GDP growth is stronger than foreign exchange (FX) credits where the latter is significant until 2015. iv) Public and domestic private banks are the main drivers of economic activity while the foreign banks are following them. By showing the differential effects of different types of credit on GDP growth, we specify that shocks to different credit types are crucial to analyze business cycles. For policymakers, this result implies that the dynamics of different credit types are crucial to analyze the impacts of credit cycles on economic activity.