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Accounting For The Great Recession In The Uk: Real Business Cycles And Financial Frictions

Author

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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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Suggested Citation

  • Jagjit S. Chadha & James Warren, 2013. "Accounting For The Great Recession In The Uk: Real Business Cycles And Financial Frictions," Manchester School, University of Manchester, vol. 81, pages 43-64, October.
    • Handle: RePEc:bla:manchs:v:81:y:2013:i::p:43-64
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    File URL: http://hdl.handle.net/10.1111/manc.2013.81.issue-s2
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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 17:15:12
    2. 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 17:15:12
    3. Some doubts about NGDP targets
      by chris dillow in Stumbling and Mumbling on 2012-04-27 16:21:33
    4. Some doubts about NGDP targets
      by chris dillow in Stumbling and Mumbling on 2012-04-27 16:21:33

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    Cited by:

    1. Emmanuel Ameyaw, 2023. "The relevance of domestic and foreign factors in driving Ghana’s business cycle," SN Business & Economics, Springer, vol. 3(9), pages 1-33, September.
    2. Leal, Matheus Cardoso & Nakane, Márcio Issao, 2025. "Brazilian economy in the 2000’s: A tale of two recessions," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 6(1).
    3. De Grauwe, Paul & Gerba, Eddie, 2018. "The role of cognitive limitations and heterogeneous expectations for aggregate production and credit cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 206-236.
    4. Brinca, Pedro & João, Costa-Filho, 2021. "Output falls and the international transmission of crises," MPRA Paper 107297, University Library of Munich, Germany.
    5. Calvert Jump, Robert & Kohler, Karsten, 2022. "A history of aggregate demand and supply shocks for the United Kingdom, 1900 to 2016," Explorations in Economic History, Elsevier, vol. 85(C).
    6. Pedro Brinca & João Ricardo Costa Filho & Francesca Loria, 2024. "Business cycle accounting: What have we learned so far?," Journal of Economic Surveys, Wiley Blackwell, vol. 38(4), pages 1276-1316, September.
    7. Brinca, Pedro & Costa-Filho, João, 2021. "Economic depression in Brazil: the 2014-2016 fall," MPRA Paper 107298, University Library of Munich, Germany.
    8. Michael Donadelli & Vahid Mojtahed & Antonio Paradiso, 2015. "Technological Progress, Investment Frictions and Business Cycle: New Insights from a Neoclassical Growth Model," Working Papers LuissLab 15119, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    9. repec:ehl:lserod:56407 is not listed on IDEAS
    10. Gerba, Eddie, 2015. "Have the US macro-financial linkages changed? The balance sheet dimension," LSE Research Online Documents on Economics 59886, London School of Economics and Political Science, LSE Library.
    11. Jagjit Chadha & Young-Kwan Kang, 2016. "Finance and Credit in a Model of Monetary Policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 471, National Institute of Economic and Social Research.
    12. Jagjit S. Chadha, 2014. "Financial frictions and macroeconomic models: a tour d'horizon," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 80-98, April.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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