Animal Spirits Through Creative Destruction

Patrick Francois () and Huw Lloyd-Ellis

American Economic Review, 2003, vol. 93, issue 3, 530-550

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.

Date: 2003
Note: DOI: 10.1257/000282803322156972
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Citations: View citations in EconPapers (152)

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