A History of Aggregate Demand and Supply Shocks for the United Kingdom, 1900 to 2016

41 Pages Posted: 12 Jan 2021 Last revised: 4 Mar 2022

See all articles by Robert Calvert Jump

Robert Calvert Jump

University of Greenwich - Business School

Karsten Kohler

Leeds University Business School

Date Written: March 1, 2022

Abstract

While economic theory has been applied to numerous topics in economic history, there are very few attempts to interpret major macroeconomic shocks from the perspective of standard Keynesian theory. This paper presents a history of aggregate demand and supply shocks spanning 1900 - 2016 for the United Kingdom, whose signs are identified using economic theory. We utilise sign restrictions derived from an AD-AS framework consistent with the workhorse New Keynesian model, and demonstrate how they can be used to identify the signs of structural shocks. The existence of 33 large shocks is inferred from estimated vector autoregressions, comprising 21 demand shocks and 12 supply shocks. We find that aggregate supply shocks were important in the late 1920s and early 1970s, which we attribute to changes in the bargaining power of labour. We also identify positive aggregate demand shocks in the mid-1970s, which we attribute to fiscal policy and suggest that these shocks will have exacerbated the inflationary effects of the 1973 oil price crisis, while mitigating its unemployment effects.

Keywords: aggregate demand shocks, aggregate supply shocks, sign restrictions, vector autoregressive model, New Keynesian model, economic history

JEL Classification: C50, C51, N10, N13, N14

Suggested Citation

Calvert Jump, Robert and Kohler, Karsten, A History of Aggregate Demand and Supply Shocks for the United Kingdom, 1900 to 2016 (March 1, 2022). Explorations in Economic History, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3725609 or http://dx.doi.org/10.2139/ssrn.3725609

Robert Calvert Jump (Contact Author)

University of Greenwich - Business School ( email )

United Kingdom

Karsten Kohler

Leeds University Business School ( email )

Maurice Keyworth Building
Woodhouse
Leeds, England LS2 9JT
United Kingdom

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