Financial Shocks or Productivity Slowdown: Contrasting the Great Recession and Recovery in the United States and United Kingdom

Larkin, Kieran

doi:10.20955/r.103.99-126

Journal Article

Financial Shocks or Productivity Slowdown: Contrasting the Great Recession and Recovery in the United States and United Kingdom

Abstract: This article contrasts the experiences of the United States and United Kingdom during and after the Great Recession to understand the role of financial shocks in the magnitude of the crises and length of the recoveries. It starts from the common consensus that the Great Recession first and foremost was a financial crisis. It shows that relative to the United States, the Great Recession in the United Kingdom was more closely associated with a decline in productivity. Motivated by the similar behavior of financial variables at a business cycle frequency, it contrasts the behavior of the U.S. and U.K. economies through the lens of a simple real business cycle model augmented with financial shocks. A credit channel that operates on firm hiring decisions captures the magnitude of the output decline in both the United States and United Kingdom but exaggerates the response of the hours margin for the United Kindgom. The conclusion is that the financial channel supported in the U.S. data seems less appropriate for understanding the U.K. experience.

JEL Classification: E24; E32; E44; G01; G32;

https://doi.org/10.20955/r.103.99-126