Discussion Paper Details

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Title: Why crises happen - nonstationary macroeconomics

Author(s): James Davidson, David Meenagh, Patrick Minford and Michael R. Wickens

Publication Date: December 2010

Keyword(s): banking crisis, banking regulation, Bootstrap, Indirect Inference, Nonstationarity, Productivity and Real Business Cycle

Programme Area(s): International Macroeconomics

Abstract: A Real Business Cycle model of the UK is developed to account for the behaviour of UK nonstationary macro data. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a VECM representation of the data; we find the model can explain the behaviour of main variables (GDP, real exchange rate, real interest rate) but not that of detailed GDP components. We use the model to explain how 'crisis' and 'euphoria' are endemic in capitalist behaviour due to nonstationarity; and we draw some policy lessons.

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Bibliographic Reference

Davidson, J, Meenagh, D, Minford, P and Wickens, M. 2010. 'Why crises happen - nonstationary macroeconomics '. London, Centre for Economic Policy Research.