The Determinants of UK Business Cycles

Abstract

This paper considers the causes of post‐war UK business cycles. Using an extended stochastic growth model we construct estimates of productivity and preference shocks both of which are highly persistent, volatile and potentially capable of explaining UK business cycles. We find the productivity term is the dominant explanation of UK output fluctuations but our estimated preference shift is crucial in understanding employment movements. A variety of Granger causality tests establish whether these productivity and preference terms are unpredictable and so can be potentially considered as the cause of UK business cycles or whether they are themselves Granger caused by other variables.