A Schumpeterian analysis of the credit market

• I point out the analytical achievements and limits of Schumpeter's modeling of banking activity.
• I prove that Schumpeter's analysis of banking activity opens the possibility to include the credit market in sequential models.
• I show that these results are compatible with Schumpeter's two-cycle model of economic development.

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, that is the debt contract design. 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, asks 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.