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ENTREPRENEURS, FINANCIERS, AND BOOM–BUST CYCLES

  • Takuma Kunieda (a1) and Akihisa Shibata (a2)
Abstract

In this paper, a dynamic general equilibrium model with infinitely lived entrepreneurs and financiers is developed to investigate a possible mechanism that explains business cycles and financial crises. The highest growth rate is achievable only if financiers coexist with entrepreneurs, given a certain extent of financial market imperfections. However, if financiers coexist with entrepreneurs, the economy is highly likely to face a financial crisis at certain parameter values. These two-sided implications of the coexistence of entrepreneurs and financiers explain why both instability and high growth are frequently observed in modern economies. Furthermore, our model can obtain countercyclical movements in total factor productivity growth that cannot be explained by the standard real business cycle theory but were observed in the Great Recession of 2007–2008.

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Copyright
Corresponding author
Address correspondence to: Takuma Kunieda, School of Economics, Kwansei Gakuin University, 1-155 Uegahara Ichiban-Cho, Nishinomiya, Hyogo 662-8501, Japan; e-mail: tkunieda@kwansei.ac.jp.
Footnotes
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The authors would like to express special thanks to an anonymous referee and an associate editor for their invaluable comments and suggestions. The authors would like to thank Shinsuke Ikeda, Yoshiyasu Ono, seminar participants at Osaka University, and session participants of “Development Economics: Macroeconomic Issues” at the 2013 Annual Conference of the Royal Economic Society and of “Macroeconomics of Liquidity” at the 2014 SWET for their helpful comments. This study has received financial support from a Grant-in-Aid for Specially Promoted Research (No. 23000001), City University of Hong Kong (No. 7004283) and the Joint Research Program of KIER, Kyoto University.

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