American Economic Review: Vol. 93 No. 3 (June 2003)


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Animal Spirits Through Creative Destruction

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Francois, Patrick, and Huw Lloyd-Ellis. 2003. "Animal Spirits Through Creative Destruction ." American Economic Review, 93(3): 530-550.

DOI: 10.1257/000282803322156972


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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Francois, Patrick
Lloyd-Ellis, Huw

American Economic Review

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