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Understanding the macroeconomic effects of working capital in the United Kingdom

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  • Fernandez-Corugedo, Emilio
  • McMahon, Michael
  • Millard, Stephen
  • Rachel, Lukasz

Abstract

In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks.

Suggested Citation

  • Fernandez-Corugedo, Emilio & McMahon, Michael & Millard, Stephen & Rachel, Lukasz, 2011. "Understanding the macroeconomic effects of working capital in the United Kingdom," Economic Research Papers 270765, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:270765
    DOI: 10.22004/ag.econ.270765
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    Cited by:

    1. Millard, Stephen & Nicolae, Anamaria, 2014. "The effect of the financial crisis on TFP growth: a general equilibrium approach," Bank of England working papers 502, Bank of England.
    2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    3. Millard, Stephen & Varadi, Alexandra & Yashiv, Eran, 2018. "Shock transmission and the interaction of financial and hiring frictions," Bank of England working papers 769, Bank of England.
    4. Tayler, William & Zilberman, Roy, 2014. "Macroprudential Regulation and the Role of Monetary Policy," Dynare Working Papers 37, CEPREMAP.
    5. Agénor, Pierre-Richard & Pereira da Silva, Luiz A., 2014. "Macroprudential regulation and the monetary transmission mechanism," Journal of Financial Stability, Elsevier, vol. 13(C), pages 44-63.
    6. Marcin Bielecki, 2022. "Long Shadows of Financial Shocks: An Endogenous Growth Perspective," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 1-23.
    7. Mr. Thorvardur Tjoervi Olafsson, 2018. "Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy," IMF Working Papers 2018/202, International Monetary Fund.
    8. Kapetanios, George & Price, Simon & Young, Garry, 2018. "A UK financial conditions index using targeted data reduction: Forecasting and structural identification," Econometrics and Statistics, Elsevier, vol. 7(C), pages 1-17.
    9. Davide Melcangi, 2024. "Firms' Precautionary Savings and Employment during a Credit Crisis," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 356-386, January.
    10. Enqvist, Julius & Graham, Michael & Nikkinen, Jussi, 2014. "The impact of working capital management on firm profitability in different business cycles: Evidence from Finland," Research in International Business and Finance, Elsevier, vol. 32(C), pages 36-49.
    11. Martha Coleman & Justice Mark Baidoo, 2020. "The Interaction of Financial Leverage and Firm's Operational Efficiency," Business and Economic Research, Macrothink Institute, vol. 10(1), pages 235-250, March.
    12. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
    13. Barnett, Alina & Batten, Sandra & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The UK productivity puzzle," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 114-128.
    14. Mahmoudzadeh, Amineh & Nili, Masoud & Nili, Farhad, 2018. "Real effects of working capital shocks: Theory and evidence from micro data," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 191-218.
    15. Tayler, William J. & Zilberman, Roy, 2016. "Macroprudential regulation, credit spreads and the role of monetary policy," Journal of Financial Stability, Elsevier, vol. 26(C), pages 144-158.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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