Is There a Financial Accelerator Mechanism in the Turkish Banking Industry?

Abstract

This paper empirically investigates the cyclical behavior of price-cost marginsfor Turkish banks over the 2002q1-2017q3 period by exploiting dynamic panel datamodeling approaches. The estimation results indicate that margins behavecountercyclically during economic fluctuations. It appears that Turkish banks’ price-costmargins tend to stay high acting countercyclical during economic downturns, which maylimit the supply of loans and thereby, cause a further reduction in production, deepeningthe contraction. Specifically, several bank-specific characteristics, that is; banks’liquidity, capitalization and size, together with the monetary policy and marketconcentration in the banking industry are found to be crucial in explaining thecountercyclical behavior of net interest margins in Turkey. Furthermore, the recentglobal financial crisis in the late 2008 seems to have a considerable effect on the banksmargins as well. Overall, these findings provide evidence for the existence of “financialaccelerator” at work in the Turkish economy during the period under investigation.