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Creative Destruction with Credit Inflation

Author

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  • Qichun He

    (Central University of Finance and Economics)

  • Heng-fu Zou

    (Development Research Group, World Bank)

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.

Suggested Citation

  • Qichun He & Heng-fu Zou, 2013. "Creative Destruction with Credit Inflation," CEMA Working Papers 591, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:591
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    References listed on IDEAS

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    More about this item

    Keywords

    Creative Destruction; Credit Inflation; Credit Demand Function; Nash Bargaining;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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