Understanding the macroeconomic effects of working capital in the United Kingdom

In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks.


Issue Date:
Jul 04 2011
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
Record Identifier:
https://ageconsearch.umn.edu/record/270765
Language:
English
Total Pages:
40
JEL Codes:
E20; E51; E52
Series Statement:
WERP 959




 Record created 2018-04-05, last modified 2020-10-28

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