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1 FINANCE AND GROWTH HAKAN YILMAZKUDAY There is a growing literature on economic growth and its determinants. Although it is a topic of which origins can be traced back to old time literature, the analysis of specific relation between finance and growth belongs to “new” growth literature. In this context, the earliest theoretical attempts that stress the connection between a country’s financial superstructure and its real infrastructure belong to Goldsmith (1969), McKinnon (1973) and Shaw (1973). While Goldsmith focuses on the effect of financial superstructure of an economy on the acceleration of economic growth to the extent that the economic performance is related to the migration of funds to the best projects available, McKinnon and Shaw emphasize the government restrictions, such as interest rate ceilings, high reserve requirements, and directed credit programs, that encumber financial development, and ultimately reduce growth. Besides, according to McKinnon, in the lack of a convenient financial superstructure, the Less Developed Countries (LDCs) have the problem of indivisibility, the problem of fragmentation and migration of funds to the projects that are not best in terms of returns to the society. These problems lead LDCs to work with old kind of technologies, and thus low growth rates. Similar conclusions are reached by other papers that have developed endogenous
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This note was uploaded on 01/11/2012 for the course ECO 601 taught by Professor Hakanyilmazkuday during the Fall '11 term at FIU.

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