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Creative Destruction with Credit Inflation

  • He, Qichun

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48766.

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Date of creation: Jul 2013
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Handle: RePEc:pra:mprapa:48766
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