Banks, Credit Reallocation, and Creative Destruction

Christian Keuschnigg, Michael Kogler () and Johannes Matt
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Johannes Matt: London School of Economics & Political Science (LSE)

No 22-83, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: How do banks facilitate creative destruction and shape firm turnover? We develop a dynamic general equilibrium model of bank credit reallocation with endogenous firm entry and exit that allows for both theoretical and quantitative analysis. By restructuring loans to firms with poor prospects and high default risk, banks not only accelerate the exit of unproductive firms but also redirect existing credit to more productive entrants. This reduces banks’ dependence on household deposits that are often supplied inelastically, thereby relaxing the economy’s resource constraint. A more efficient loan restructuring process thus fosters firm creation and improves aggregate productivity. It also complements policies that stimulate firm entry (e.g., R&D subsidies) and renders them more effective by avoiding a crowding-out via a higher interest rate.

Keywords: creative destruction; reallocation; bank credit; productivity (search for similar items in EconPapers)
JEL-codes: E23 E44 G21 O4 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2022-11
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dge, nep-fdg, nep-mon and nep-tid
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Related works:
Working Paper: Banks, Credit Reallocation, and Creative Destruction (2024)
Working Paper: Banks, Credit Reallocation, and Creative Destruction (2023)
Working Paper: Banks, Credit Reallocation, and Creative Destruction (2022)
Working Paper: Banks, Credit Reallocation, and Creative Destruction (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2283

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