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Literature Review

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Literature Review

There are a number of literatures on economic growth and its contributing factors. It is a topic of interest which can be traced back to old time. Many empirical literature on this issue attempts to examine whether one type of financial system better explains economic growth than another.
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,
Similar conclusions are reached by other papers that have developed endogenous growth theories, in which growth and financial structure are determined explicitly in relevant models. In the group of these endogenous growth models, Greenwood and Jovanovic (1990; GJ henceforth) concentrate on the concepts of information collection, information analysis and risk sharing in order to analyze the effects of financial structure on economic growth.
GJ set up a model that captures the main idea of Goldsmith (1969) in the sense that the migration of funds to the best available projects is the main engine for growth. In GJ model, investment in organizational capital is costly. Thus, only high-income economies, which have better financial superstructure, are capable of investing in organizational capital.
The bottom line is that the relation between financial superstructure and growth is the key to the long-run growth of the economies. Since setting up a financial structure is costly, the economies with low-income levels (LDCs) have problems with accessing financial capitals. As we mentioned above, according to McKinnon (1973), in

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