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SCHUMPETER’S ANALYSIS OF THE CREDIT MARKET Marcello Messori Department of ‘Economia e Istituzioni’ University of Rome ‘Tor Vergata’ (Italy) Schumpeter shows that bank credit acts as money-capital and, therefore, constitutes the necessary premise for the realization of the innovative processes planned by entrepreneurs. This makes it important to specify the debt contracts between each bank and entrepreneurs during the prosperity phase of Schumpeter’s cyclical development. The present paper aims to point out the achievements and the limits of Schumpeter’s monetary theory with respect to this point. On the side of the limits, I maintain that Schumpeter’s approach, although representing one of the most stimulating contributions in the history of economic analysis, ask for refinements as regard to the objective- function of the individual banks, the determination of the interest rates, and the usableness of the credit demand and supply curves. Schumpeter’s posthumous treatise on money provides stimulating insights for the definition of these refinements, and it highlights that the author is a precursor of the recent literature on the debt contracts design. Marcello Messori Dipartimento di Economia e Istituzioni Facoltà di Economia Università di Roma Tor Vergata e-mail: [email protected] 0
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SCHUMPETER’S ANALYSIS OF THE CREDIT MARKET* 1. Introduction Schumpeter's monetary theory gives great importance to the role of banks. It shows that bank credit acts as (money)-capital and, therefore, constitutes the necessary premise for the realization of the innovative processes planned by the entrepreneurs and their imitators. In a previous paper (Messori 2004) I have examined the differences between this monetary approach which Schumpeter (1954) names 'credit theory of money', and a more traditional approach labeled by the same author as 'monetary theory of credit'. The differences between these two approaches have offered the opportunity for a detailed analysis of the time sequence which characterizes Schumpeter’s framework of the cyclical development. However, in Messori (2004) I have not examined the determination of the debt contracts between banks and entrepreneurs (including imitators) during the two-phase cycle. This is an important analytical gap since Schumpeter's monetary theory concerning the debt contracts offers valuable hints and crucial theoretical pieces in a field at length neglected by the economic theory, and recently revived by the asymmetric information models on the existence of financial intermediaries and on the working of credit market (see Diamond 1984, Gale-Hellwig 1985, Stiglitz-Weiss 1981 and 1992, Innes 1991; Freixas-Rochet 1997). The present paper aims to investigate Schumpeter’s analysis of bank behavior and to compare it with the more recent literature on the role played by banks.
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