Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions

22 Pages Posted: 31 Oct 2013

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

James Warren

University of Kent - Department of Economics

Date Written: October 2013

Abstract

Using the business cycle accounting (BCA) framework, we examine the 2008–9 recession in the UK. The recession appears to have been mostly driven by shocks to the efficiency wedge in total production, rather than intertemporal (asset price) consumption. From an expenditure perspective this result is consistent with the large observed falls in both consumption and investment. Simulated data from a dynamic stochastic general equilibrium (DSGE) model in which asset price shocks dominate finds no strong role for the intertemporal consumption wedge. This result implies that financial frictions work through more than just this channel.

Suggested Citation

Chadha, Jagjit S. and Warren, James, Accounting for the Great Recession in the UK: Real Business Cycles and Financial Frictions (October 2013). The Manchester School, Vol. 81, pp. 43-64, 2013. Available at SSRN: https://ssrn.com/abstract=2347786 or http://dx.doi.org/10.1111/j.1467-9957.2012.02320.x

Jagjit S. Chadha (Contact Author)

University of St. Andrews - School of Management ( email )

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James Warren

University of Kent - Department of Economics

Keynes College
Kent, CT2 7NP
United Kingdom

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