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

Author

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  • Dacic, Nikola

    (Goldman Sachs & Co)

  • Melolinna, Marko

    (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’.

Suggested Citation

  • Dacic, Nikola & Melolinna, Marko, 2019. "The empirics of granular origins: some challenges and solutions with an application to the UK," Bank of England working papers 842, Bank of England.
    • Handle: RePEc:boe:boeewp:0842
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    References listed on IDEAS

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    2. Jozef Konings & Galiya Sagyndykova & Venkat Subramanian & Astrid Volckaert, 2023. "The granular nature of emerging market economies: The case of Kazakhstan," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 429-464, April.

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    More about this item

    Keywords

    business cycle; aggregate volatility; granularity hypothesis; firm-level productivity;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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