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Banks, Credit Reallocation, and Creative Destruction

Author

Listed:
  • Christian Keuschnigg

    (University of St.Gallen, Institute of Economics (FGN-HSG))

  • Michael Kogler

    (German Council of Economic Experts)

  • Johannes Matt

    (London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

Abstract

How do banks’ lending decisions influence firm turnover and creative destruction? We develop a dynamic general equilibrium model in which banks restructure loans with high default risk, thereby releasing funds for new lending and forcing firms with poor prospects to close down. By reducing banks’ reliance on external funds, loan restructuring lowers the equilibrium interest rate, which stimulates firm creation. We derive analytical and quantitative results from the model calibrated to German data: A lower cost of loan liquidation (e.g., improved insolvency laws) accelerates firm entry and exit, and boosts aggregate capital productivity mainly by incentivizing more active credit reallocation. Restructuring also complements policies that aim at stimulating firm creation (e.g., R&D subsidies) as it mitigates a crowding-out of entry via the interest rate.

Suggested Citation

  • Christian Keuschnigg & Michael Kogler & Johannes Matt, 2024. "Banks, Credit Reallocation, and Creative Destruction," Discussion Papers 2404, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2404
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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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