The Determinants of UK Business Cycles

51 Pages Posted: 20 Jan 1997

See all articles by Allison Holland

Allison Holland

Bank of England

Andrew Scott

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 1996

Abstract

This paper considers the ultimate causes of post-war UK business cycles. Using an extended stochastic growth model we construct estimates of a productivity and preference shock, both of which are highly persistent, volatile and potentially capable of explaining UK business cycles. We find the productivity term is the dominant explanation of UK output fluctuations, but our estimated preference shift is crucial in understanding employment movements. We use a variety of Granger causality tests to establish whether these productivity and preference terms are predictable and so can be potentially considered as the ultimate cause of UK business cycles, or whether they are themselves Granger caused by other variables. We find our estimated productivity term is not predicted by any demand-side variable, including various fiscal and monetary policy instruments, but is, to a limited extent, predicted by oil prices and the share of taxes in GDP. This suggests that our "productivity" shock may also reflect other supply-side influences. In contrast, we find our "preference" shift is predicted to a substantial extent by real variables, such as the terms of trade and oil prices, and nominal variables, such as the money supply and the price level. The implications of these findings for competing theories of the business cycle and for the monetary transmission mechanism are discussed.

JEL Classification: E1, E3

Suggested Citation

Holland, Allison M. and Scott, Andrew, The Determinants of UK Business Cycles (June 1996). Available at SSRN: https://ssrn.com/abstract=3660 or http://dx.doi.org/10.2139/ssrn.3660

Allison M. Holland

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andrew Scott (Contact Author)

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7706 6780 (Phone)
+44 20 7402 7875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom