THE DETERMINANTS OF UK BUSINESS CYCLES

This paper considers the causes of post-war UK business cycles. Using an extended stochastic growth model we construct estimates of producti vity and preference shock; both of which are highly persistent, volati le and potentially capable of explaining UK business cycles. We find t he productivity term is the dominant explanation of UK output fluctuat ions but our estimated preference shift is crucial in understanding em ployment movements. A variety of Granger causality tests establish whe ther these productivity and preference terms are unpredictable and so can be potentially considered as the cause of UK business cycles or wh ether they are themselves Granger caused by other variables.