Banks, Credit Reallocation, and Creative Destruction

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 10093

Classification and Topics

• Classification: Wirtschaft ; Macroeconomics: Production ; Financial Markets and the Macroeconomy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Economic Growth and Aggregate Productivity: General
• Subject: creative destruction ; reallocation ; bank credit ; productivity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Keuschnigg, Christian ; Kogler, Michael ; Matt, Johannes
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/267325
• Last update: 10.03.2025, 11:42 AM CET