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

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 20 December 2019

Staff Working Paper No. 842

By Nikola Dacic and Marko Melolinna

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’. 

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

Give your feedback

Was this page useful?
Yes
No
Add your details...