Working Paper: CEPR ID: DP17701
Authors: Christian Keuschnigg; Michael Kogler; Johannes Matt
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.
Keywords: creative destruction; reallocation; bank credit; productivity
JEL Codes: E23; E44; G21; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks restructuring loans to firms with poor prospects (G21) | exit of unproductive firms (J63) |
| exit of unproductive firms (J63) | release of funds for new ventures (M13) |
| banks redirecting existing credit to more productive entrants (G21) | overall productivity (O49) |
| stimulating firm creation through R&D subsidies (O38) | crowding out if not paired with improved loan restructuring (F65) |
| improving efficiency of loan restructuring (G33) | accelerates firm exit (D25) |
| improving efficiency of loan restructuring (G33) | fosters new firm creation (L26) |
| without restructuring (C69) | aggregate productivity could be 9-18% lower (E23) |