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Supply Shocks and the ‘Natural Rate of Interest': an Exploration

  • Chadha, J.S.
  • Nolan, C.

We develop two variants of an open economy general equilibrium model employing Blanchard-Yaari life overlapping generations, which are shown to capture a number of important aspects of the UK economic cycle. We analyse the equilibrium stochastic processes of the model’s endogenous variables in response to two primitive driving processes: total factor productivity and various measures of total factor productivity corrected for capacity utilisation over the cycle. We find, following Vickers’ (2000) suggestion, that the marginal product of capital is procyclical. Interestingly, we find that the difference between the procyclical real rate from the artificial economies and the observed real rate seems to play a role in explaining the UK inflation and output outcomes.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/wp0103.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0103.

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Length: 24
Date of creation: Feb 2001
Date of revision:
Handle: RePEc:cam:camdae:0103
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Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  2. Zvi Griliches, 1995. "The Discovery of the Residual: An Historical Note," NBER Working Papers 5348, National Bureau of Economic Research, Inc.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  5. Chadha, Jagjit S & Janssen, Norbert & Nolan, Charles, 2001. "Productivity and Preferences in a Small Open Economy," Manchester School, University of Manchester, vol. 69(0), pages 57-80, Supplemen.
  6. Robert G. King & Mark W. Watson, 1995. "Money, prices, interest rates and the business cycle," Working Paper Series, Macroeconomic Issues 95-10, Federal Reserve Bank of Chicago.
  7. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  8. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  9. S Millard & Andrew Scott & M Sensier, 1997. "The Labour Market over the Business Cycle: Can Theory Fit the Facts?," CEP Discussion Papers dp0364, Centre for Economic Performance, LSE.
  10. Robert J. Barro, 1998. "Notes on Growth Accounting," NBER Working Papers 6654, National Bureau of Economic Research, Inc.
  11. Zvi Griliches, 1995. "The Discovery of the Residual: A Historic Note," Harvard Institute of Economic Research Working Papers 1742, Harvard - Institute of Economic Research.
  12. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  13. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  14. Crafts, Nicholas, 2002. "The Solow Productivity Paradox in Historical Perspective," CEPR Discussion Papers 3142, C.E.P.R. Discussion Papers.
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