Time-varying Granger Causality between Industrial Production and Non-Performing Loans in Türkiye

Banks play a crucial role in bridging fund suppliers and demanders, thereby facilitating economic development by channeling idle funds into the economy. For banks to effectively perform their functions, the financial transmission mechanism is essential. Non-performing loans (NPLs) significantly impact bank profitability, credit positions, and overall economic development. This study investigates the relationship between industrial production and non-performing loans in Turkey using a time-varying Granger Causality test. Monthly data from January 2005 to July 2024 was utilized to examine the interconnection between the industrial production index and non-performing loans. The research uniquely contributes to the existing literature by applying a sophisticated time-varying Granger Causality methodology, investigating the dynamic relationship between economic activity and credit risk, and providing insights into the temporal variations of industrial production and non-performing loans within the Turkish banking sector. Key methodological approaches include utilizing a recursive evolving window algorithm, employing bootstrap simulations to enhance estimation precision, and analyzing causal relationships through multiple computational techniques. Findings underscore the importance of adaptive risk management strategies and the need for flexible macroprudential policies capable of responding to the evolving economic landscape.