Working Paper: CEPR ID: DP8157
Authors: James Davidson; David Meenagh; Patrick Minford; Michael R. Wickens
Abstract: A Real Business Cycle model of the UK is developed to account for the behaviour of UK nonstationary macro data. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a VECM representation of the data; we find the model can explain the behaviour of main variables (GDP, real exchange rate, real interest rate) but not that of detailed GDP components. We use the model to explain how 'crisis' and 'euphoria' are endemic in capitalist behaviour due to nonstationarity; and we draw some policy lessons.
Keywords: banking crisis; banking regulation; bootstrap; indirect inference; nonstationarity; productivity; real business cycle
JEL Codes: E32; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonstationary shocks to productivity (O49) | GDP (E20) |
| nonstationary shocks to productivity (O49) | real interest rates (E43) |
| nonstationary shocks to productivity (O49) | consumption (E21) |
| nonstationary shocks to productivity (O49) | economic downturns (F44) |
| GDP (E20) | economic downturns (F44) |