Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267325 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10093
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
creative destruction
reallocation
bank credit
productivity
JEL: 
E23
E44
G21
O40
Document Type: 
Working Paper
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