Tradable and non-tradable loans, provincial growth and state-owned banks

Abstract

This thesis examines the dynamic relationship between sectoral credit allocation and provincial GDP growth in Turkey, with a special focus on tradable and non-tradable credits, as well as the influence of state-owned bank lending. For this purpose, I use panel data across 81 provinces in Turkey and employ local projection methodology over five-year horizons covering the period between 2007 and 2023. The results reveal that a one standard deviation increase in three-year non-tradable credit change initially boosts GDP growth, also measured over a threeyear window, by approximately 1.9%, but this effect reverses and becomes significantly negative in the medium term, with peak adverse effects of nearly ˘4.9% after four years. On the contrary, three-year tradable credit change yields moderate but consistent gains, with a one standard deviation increase associated with approximately 1.7\% higher GDP growth in the medium term. The analysis restricted to state-owned bank credit allocation reveals the boom-bust dynamic in non-tradable lending. Further controlling for firm entry and credit intensity, the study finds that new firm formation—particularly in the non-tradable sector—enhances growth, whereas credit expansion alone, in the absence of new firm entry per capita variable, fails to produce durable economic gains. Overall, the results underscore the critical role of credit composition and institutional lending channels in shaping long-term provincial growth. Sectoral biased lending or politically driven credit allocation, especially when concentrated in the non-tradable sector, may deliver short-lived gains at the cost of future stability and sustainable development.