Comment on “ From Search to Match : When Loan Contracts are Too Long ” by Christophe Chamley and Céline

Reallocation is an equilibrium phenomenon. Economic restructuring is ceaseless and is a critical aspect of economic activity. This has been recognized at least since Schumpeter who emphasized the need for constant restructuring and coined the term creative destruction (see, e.g., Schumpeter (1942)). Reallocation is not frictionless however, and the impediments to reallocation and their macroeconomic consequences are studied in a recent and growing literature. Particularly pertinent is the interaction between financing and reallocation, and its effect on business cycle fluctuations and growth. Chamley and Rochon (2010, this issue of the JMCB) consider a model with random matching of banks with loanable funds and entrepreneurs with financing needs. Banks’ incentives to roll over loans instead of liquidating them and freeing up loanable funds for redeployment depend on the ease with which loanable funds can be reallocated to other entrepreneurs. The main result is that there are two steady state equilibria, one with a lot of reallocation and the other with limited reallocation. In a ∗Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC, 27708; (919) 6607797; [email protected].