Understanding the macroeconomic effects of working capital in the United Kingdom

Emilio Fernandez-Corugedo, Michael McMahon, Stephen Millard and Lukasz Rachel
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Emilio Fernandez-Corugedo: Bank of England

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: 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. Key words: Working capital ; business cycle model ; spreads ; financial crisis. JEL classification: E20 ; E51 ; E52

Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (10)

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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)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:959

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