Financial Effects on Corporate Investment in UK Business Cycles

Abstract

The slowdown in corporate investment in the early 1990s recession was more marked than in the equivalent period of the 1980s downturn. This article reviews corporate sector investment and financial health in these periods. It then uses a 'credit channel' model to consider the potential for interactions between corporate financial positions and investment spending. Simulations of the model suggest that financial effects may vary in strength over time. In particular, the model provides some support for the view that financial effects might have been relatively more important in the early 1990s recession, given the greater dependence of the corporate sector at that time on external borrowing.