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The empirics of granular origins: some challenges and solutions with an application to the UK

Nikola Dacic () and Marko Melolinna ()
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Nikola Dacic: Goldman Sachs & Co
Marko Melolinna: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 842, Bank of England working papers from Bank of England

Abstract: We study the effects of firm-level microeconomic fluctuations on aggregate productivity in the United Kingdom. We show that a standard measure of residual productivity growth of the largest UK firms (the ‘granular residual’) produces results that are counter-intuitive and not statistically significant. To combat this, we introduce a unique production function approach to estimate firm-specific technology shocks, accounting for firm-level heterogeneity and common shocks. Using this measure, we find that firm-level shocks matter; the ‘granular residual’ explains around 30% of aggregate UK productivity dynamics. We also show that simplifications of our approach, which omit controlling for firm-level heterogeneity or do not account for common shocks, do not perform well, highlighting the importance of identifying firm-specific shocks correctly in order to properly test the ‘granularity hypothesis’.

Keywords: business cycle; aggregate volatility; granularity hypothesis; firm-level productivity (search for similar items in EconPapers)
JEL-codes: E23 E24 E32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-12-20
New Economics Papers: this item is included in nep-bec, nep-eff, nep-eur and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0842

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