VoxEU: Trade and innovation: The Schumpeterian role of banks

04 March 2019

Only strong banks can fulfil their Schumpeterian role by efficiently reallocating credit. The column argues that high capital standards, efficient bankruptcy laws, and a lower cost of bank equity improve credit reallocation and thereby support the productive specialisation of the economy. An efficient banking sector also magnifies the gains from trade liberalisation by easing the process of capital reallocation.

Authors analysis has four main results:

Authors believe that free trade can yield larger benefits if complementary policies can ease the process of factor reallocation and structural change.

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