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Animal Spirits Through Creative Destruction

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  • Patrick Francois
  • Huw Lloyd-Ellis

Abstract

We show how a Schumpeterian process of creative destruction can induce rational, herd behavior by entrepreneurs across diverse sectors as if fueled by "animal spirits." Consequently, a multisector economy, in which productivity improvements are made by independent, profit-seeking entrepreneurs, exhibits regular booms, slowdowns, and downturns as part of the long-run growth process. Our cyclical equilibrium has higher average growth, but lower welfare than the corresponding acyclical one. We show how a negative relationship can emerge between volatility and growth across cycling economies, and assess the extent to which our model matches several features of actual business cycles.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803322156972
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 3 (June)
Pages: 530-550

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:3:p:530-550

Note: DOI: 10.1257/000282803322156972
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  1. Fatas, Antonio, 2000. " Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth," Journal of Economic Growth, Springer, vol. 5(2), pages 147-62, June.
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