Creative Destruction with Credit Inflation

He, Qichun (2013): Creative Destruction with Credit Inflation.

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. Empirical evidence from the U.S. and China is provided.

• Item Type: MPRA Paper
• Language: English
• Keywords: Creative Destruction; Credit Inflation; Credit Demand Function; Nash Bargaining
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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