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Recession and Recovery in the United Kingdom in the 1990s: Identifying the Shocks

Published online by Cambridge University Press:  26 March 2020

Luis Catão  and
Ramana Ramaswamy
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Abstract

This article uses a vector autoregression (VAR) approach to identify the causes of the 1990-92 recession in the UK. The VAR approach is shown to be particularly pertinent for quantifying the relative magnitude of the different demand shocks, and in decomposing them into monetary and expectational factors. The main finding is that the recent recession was precipitated primarily by shocks to consumption, and that the prior monetary tightening and the subsequent collapse in the housing market explain just part of this contraction. Non-monetary shocks also appear to have played an important role in bringing about the recession. The VAR model also offers interesting insights on the nature of the recovery that is currently under way.

Type
Articles
Information
National Institute Economic Review , Volume 157 , July 1996 , pp. 97 - 106
Copyright
Copyright © 1996 National Institute of Economic and Social Research

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Footnotes

∗

International Monetary Fund. The views expressed in the article are those of the authors, and not necessarily those of the International Monetary Fund. This article was prepared as background material for the IMF's annual consultations with the UK Treasury and the Bank of England. We are grateful to numerous colleagues at the IMF for comments on previous versions. We are also grateful to David Begg, Wilhem Buiter, Ken Coutts, Brian Henry, Nigel Pain, Angel Ubide-Querol, Rod Whittaker, two referees of this journal, and seminar participants at Cambridge University and the London School of Economics for useful suggestions.

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