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Entrepreneurship, financial frictions and the welfare gains of business cycles

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  • Merlin, Giovanni Tondin

Abstract

I propose a simple method to solve a heterogeneous agent model with entrepreneurship, financial frictions and aggregate uncertainty. Aggregate shocks, in this context, induce potential entrepreneurs to save in order to slack their financial constraints, leading to a significant increase in aggregate savings, pushing up wages and lowering interest rates. This channel can be strong enough to more than offset the effect of fluctuations on consumption, leading to welfare gains of business cycles.

Suggested Citation

  • Merlin, Giovanni Tondin, 2018. "Entrepreneurship, financial frictions and the welfare gains of business cycles," Textos para discussão 484, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
  • Handle: RePEc:fgv:eesptd:484
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