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The 1980s Recession in the UK: A Business Cycle Accounting Perspective

  • Erasmus Kristoffer Kersting

    (Texas A&M University)

This paper applies 'Business Cycle Accounting' methodology introduced by Chari, Kehoe and McGrattan (2002a) to the UK economy. In particular, I examine the cyclical episode from 1979 to 1989. The chosen method enables me to decompose fluctuations in aggregates to isolate the effects corresponding to different distortions in the underlying model. I find distortions in the labor-leisure decision to play a significant role in both the recession in the early 1980s and the subsequent recovery of the UK economy. Furthermore, scenario simulations show that the improvement of the labor wedge was necessary for the recovery of the UK economy starting in 1984. After reviewing evidence on the effects of the new labor market policies introduced by the Conservative government under Margaret Thatcher on union density and collective bargaining, the results suggest that the reforms were essential for the improvement in economic performance. Future research on the period should therefore focus on modeling the labor market distortions and the reforms that were intended to reduce them. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.04.004
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 1 (January)
Pages: 179-191

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Handle: RePEc:red:issued:06-153
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  1. Anderson, Evan W. & McGrattan, Ellen R. & Hansen, Lars Peter & Sargent, Thomas J., 1996. "Mechanics of forming and estimating dynamic linear economies," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 4, pages 171-252 Elsevier.
  2. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers 597, Federal Reserve Bank of Minneapolis.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
  4. David Blanchflower & Richard Freeman, 1993. "Did the Thatcher Reforms Change British Labour Market Performance?," CEP Discussion Papers dp0168, Centre for Economic Performance, LSE.
  5. Suparna Chakraborty, 2005. "Business Cycle Accounting-How important are technology shocks as a propagation mechanism? Some new evidence from Japan," Macroeconomics 0508002, EconWPA.
  6. Richard Freeman & Jeffrey Pelletier, 1989. "The Impact of Industrial Relations Legislation on British Union Density," NBER Working Papers 3167, National Bureau of Economic Research, Inc.
  7. Mary Gregory, 1998. "Reforming the Labour Market: An Assessment of the UK Policies of the Thatcher Era," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 31(4), pages 329-344.
  8. Alan Ahearne & Finn Kydland & Mark A. Wynne, 2006. "Ireland’s Great Depression," The Economic and Social Review, Economic and Social Studies, vol. 37(2), pages 215-243.
  9. David G. Blanchflower & Richard B. Freeman, 1993. "Did the Thatcher Reforms Change British Labour Performance?," NBER Working Papers 4384, National Bureau of Economic Research, Inc.
  10. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1, December.
  11. Keiichiro Kobayashi & Masaru Inaba, 2006. "Business cycle accounting for the Japanese economy," 2006 Meeting Papers 313, Society for Economic Dynamics.
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