What Drives Business Investment in the United Kingdom? Results from a Firm-Level VAR Approach

35 Pages Posted: 13 Feb 2017

See all articles by Marko Melolinna

Marko Melolinna

Bank of Finland - Monetary Policy

Date Written: February 10, 2017

Abstract

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.

Keywords: usiness cycle, micro data, vector autoregression, sign restrictions, time-varying parameters

JEL Classification: C11, C32, D21, E32, E52

Suggested Citation

Melolinna, Marko, What Drives Business Investment in the United Kingdom? Results from a Firm-Level VAR Approach (February 10, 2017). Bank of England Working Paper No. 646. Available at SSRN: https://ssrn.com/abstract=2916065 or http://dx.doi.org/10.2139/ssrn.2916065

Marko Melolinna (Contact Author)

Bank of Finland - Monetary Policy ( email )

PO Box 160
00101 Helsinki
Finland

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