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Banks, Credit Reallocation, and Creative Destruction

Author

Listed:
  • Christian Keuschnigg

    (University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Michael Kogler

    (University of St. Gallen)

  • Johannes Matt

    (London School of Economics & Political Science (LSE))

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.

Suggested Citation

  • Christian Keuschnigg & Michael Kogler & Johannes Matt, 2022. "Banks, Credit Reallocation, and Creative Destruction," Swiss Finance Institute Research Paper Series 22-83, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2283
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    References listed on IDEAS

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    More about this item

    Keywords

    creative destruction; reallocation; bank credit; productivity;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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