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Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions

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  • Jagjit S. Chadha

    ()

  • James Warren

    ()

Abstract

Using the business cycle accounting (BCA) framework pioneered by Chari, Kehoe and McGratten (2006) we examine the 2008-09 recession in the UK. There has been much commentary on the financial causes of this recession, which we might have expected to shock the equation governing the intertemporal rate of substitution in consumption. However, the recession appears to have been mostly driven by shocks to the efficiency wedge in total production, rather than the intertemporal consumption, labour or spending wedge. From an expenditure perspective this result is consistent with the observed large falls in both consumption and investment during the recession. To assess this result we also simulate artificial data from a DSGE model in which asset price shocks dominate and find no strong role for the intertemporal consumption wedge using the BCA method. This result does not imply that financial frictions did not matter for the recent recession but that such frictions do not necessarily impact only on the intertemporal rate of substitution in consumption.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/1207.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 1207.

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Date of creation: Apr 2012
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Handle: RePEc:ukc:ukcedp:1207

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
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Keywords: Business Cycle Accounting; Major Recessions; TFP; Financial Frictions;

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  1. Keisuke Otsu, 2009. "International Business Cycle Accounting," IMES Discussion Paper Series 09-E-29, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
  3. Roman Sustek, 2011. "Monetary Business Cycle Accounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 592-612, October.
  4. Suparna Chakraborty, 2004. "Accounting for the 'Lost Decade' in Japan," Macroeconomics 0408009, EconWPA.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions
    by Christian Zimmermann in NEP-DGE blog on 2012-04-25 12:15:12
  2. Some doubts about NGDP targets
    by chris dillow in Stumbling and Mumbling on 2012-04-27 11:21:33
  3. Some doubts about NGDP targets
    by chris dillow in Stumbling and Mumbling on 2012-04-27 11:21:33
  4. Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions
    by Christian Zimmermann in NEP-DGE blog on 2012-04-25 12:15:12

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