Conditional impact of credit growth on macroeconomic and financial aggregates: evidence from Turkey

Purpose - The purpose of this paper is to investigate the impact of changes in credit stock on real and financial indicators in Turkey with a focus on conditional and time-varying dynamics. Design/methodology/approach - In addition to lag-augmented vector autoregression (LA-VAR) based time-varying Granger causality tests, threshold models and a research setting that identifies high/low states of credit growth based on 24-month moving averages are used to explore regime-dependent behavior. For investigating the asymmetric dynamics, the authors use a methodology that identifies good/bad news in credit growth based on 24-month moving averages and standard deviations. Findings - Results strongly suggest that the impact of changes in credit stock induces conditional responses. Moreover, we find evidence for asymmetric responses. In the case of Turkey, efforts to spur growth through credit produce a strong negative byproduct, a depreciation in the exchange rate. The authors also find that changes in credit stock have become more relevant for uncertainties in inflation and exchange rate expectations, particularly in the era after mid-2018 in which credit growth volatility has increased noticeably. Originality/value - This study provides a comprehensive analysis of time-varying and conditional responses to a change in credit stock in a major emerging economy. Using a moving threshold based only on the available information in the analysis of state-dependency represents a new approach.