Understanding the macroeconomic effects of working capital in the United Kingdom

Emilio Fernandez-Corugedo (), Michael McMahon, Stephen Millard and Lukasz Rachel
Additional contact information
Emilio Fernandez-Corugedo: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 422, Bank of England working papers from Bank of England

Abstract: The most recent recession has been associated with a financial crisis that led to a large widening of spreads and quantitative restrictions on lending. As well as affecting investment, such a credit contraction is likely to have had a large effect on the working capital positions of UK firms and this, in turn, is likely to have affected the United Kingdom’s supply potential, at least temporarily. However, the role of such disruptions in the business cycle is not well understood. In this paper we first document the behaviour of working capital in the United Kingdom. In order to understand the effects of working capital on macroeconomic variables, we then solve and calibrate a DSGE model that introduces an explicit role for the components of working capital (net cash, inventories, and trade credit). We find that this model produces the standard responses of macroeconomic variables to productivity shocks, but we also find that financial intermediation shocks, similar to those experienced in the United Kingdom post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model also documents a crucial role for monetary policy to offset such shocks.

Keywords: Working capital; business cycle model; spreads; financial crisis. (search for similar items in EconPapers)
JEL-codes: E20 E51 E52 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2011-04-18
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... apital-in-the-uk.pdf Full text (application/pdf)

Related works:
Working Paper: Understanding the macroeconomic effects of working capital in the United Kingdom (2011)
Working Paper: Understanding the macroeconomic effects of working capital in the United Kingdom (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0422

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().