Financial Accelerator Effects in UK Business Cycles

Abstract

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.