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Financial accelerator effects in UK business cycles

  • Simon Hall
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    This paper uses a dynamic general equilibrium model incorporating financial accelerator effects to examine interactions between corporate investment and financial conditions in recent UK business cycles. The paper notes correspondences in recent recessions between the behaviour of business investment, the financial health of the corporate sector and some indicators of the availability of finance. It then investigates whether a financial accelerator model, developed by Bernanke, Gertier and Gilchrist (1999), can shed light on key features of recent recessions. The model is calibrated to broadly match UK financial conditions prevailing at the start of recent recessions, and is simulated with and without its financial accelerator mechanism. Simulations of the model incorporating financial accelerator effects seem consistent with some of the observed features of corporate real and financial behaviour in previous downturns.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2002/wp150.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 150.

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    Date of creation: Dec 2001
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    Handle: RePEc:boe:boeewp:150
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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    4. Marion Kohler & Erik Britton & Tony Yates, 2000. "Trade credit and the monetary transmission mechanism," Bank of England working papers 115, Bank of England.
    5. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    6. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    7. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    10. Hart, O. & Moore, J., 1991. "A Theory of Debt Based on the Inalienability of Human Capital," Working papers 592, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Stephen D. Oliner & Glenn D. Rudebusch, 1993. "Is there a bank credit channel for monetary policy?," Finance and Economics Discussion Series 93-8, Board of Governors of the Federal Reserve System (U.S.).
    12. Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-46, July.
    13. repec:sae:niesru:v:144:y::i:1:p:74-84 is not listed on IDEAS
    14. Davis, E P, 1992. "Credit Quality Spreads, Bond Market Efficiency and Financial Fragility," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(0), pages 21-46, Supplemen.
    15. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
    16. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    17. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
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