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What drives business investment in the United Kingdom? Results from a firm-level VAR approach


  • Melolinna, Marko

    () (Bank of England)


This paper studies the effects of macroeconomic shocks on business investment in the United Kingdom by filtering a large UK firm-level based dataset of financial accounts into macro-level proxy indicators, and then using these indicators in a Bayesian vector autoregression framework to analyse these effects. The analysis combines micro-level data with macro-level analysis in a unique way, and brings up several interesting empirical results. Supply shocks have tended to have been more persistent and more important than demand shocks in explaining UK investment dynamics over the past fifteen years, and their importance appears to have increased since the financial crisis. Furthermore, shocks to the cost of capital, and uncertainties related to it, have generally been more important for firms in sectors with higher indebtedness, whereas corporate governance issues as measured by dividend payments and share buybacks do not appear to have been a major driver of investment.

Suggested Citation

  • Melolinna, Marko, 2017. "What drives business investment in the United Kingdom? Results from a firm-level VAR approach," Bank of England working papers 646, Bank of England.
  • Handle: RePEc:boe:boeewp:0646

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Drivers of the investment cycle
      by Bruno Duarte in EUnomics on 2018-09-06 22:04:53

    More about this item


    Business cycle; micro data; vector autoregression; sign restrictions; time-varying parameters;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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