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Creative Destruction with Credit Inflation

  • Qichun He

    (Central University of Finance and Economics)

  • Heng-fu Zou

    (Development Research Group, World Bank)

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.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 591.

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Length: 40 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:cuf:wpaper:591
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
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  19. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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