A Note on the Determinants of UK Business Cycles*

Paper number: 99/12

Paper date: December 1998

Year: 1999

Paper Category: Discussion Paper


Alexander Day
Campbell Leith
Simon Wren-Lewis
University of Exeter


In their empirical analysis of Real Business Cycle models for the UK, Holland and Scott (1998) find that they cannot reject the proposition that movements in output are largely determined by 'productivity shocks' which are independent of demand side variables, such as interest rates. In this note we extend their work to allow for the impact of financial liberalisation and credit availability. We find that credit availability has had a significant impact on movements in output, and that, when these effects are controlled for, monetary policy variables, including interest rates, also cause output. This is consistent with the conventional view that demand-expansion was the cause of the boom of the late 1980s and appears to reject a RBC interpretation of output movements.

JEL Classification Nos: E32, E50
Keywords: Business cycles, monetary policy, financial liberalisation, credit availability

Corresponding Author: Campbell B. Leith, Department of Economics, University of Glasgow, Adam Smith Building, Glasgow G12 8RT, UK, tel: (44) 141 330 4618, fax (44) 141 330 4940, email: C.B.Leith@exeter.ac.uk


* We would like to thank Allison Holland and Andrew Scott for providing us with their data set.