Creative Destruction with Credit Inflation

Qichun He and Heng-Fu Zou ()

No 591, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: We propose creative destruction as the channel for inflation to impact growth. The banks reap revenue from higher rates of credit growth, attracting more labor into banks and decreasing the profit of entrepreneurs. But when the revenue is achieved by issuing more credit to entrepreneurs, part of the revenue goes to entrepreneurs, attracting more resources into R&D. When banks retain a larger share of the revenue, the former effect dominates and credit inflation retards growth. When entrepreneurs get the larger share, the latter effect dominates and credit inflation increases growth. The welfare implications are also analyzed. Empirical evidence from the U.S. and China is provided.

Keywords: Creative Destruction; Credit Inflation; Credit Demand Function; Nash Bargaining (search for similar items in EconPapers)
JEL-codes: E31 G21 O31 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013-08
New Economics Papers: this item is included in nep-ent, nep-mac and nep-tid
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Working Paper: Creative Destruction with Credit Inflation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:591

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