The regional pervasiveness of local productivity shocks on macroeconomic output in Europe

Abstract

ABSTRACT This paper studies inter-regional technology spillover in EU-28 countries and shows how regional total factor productivity (TFP) shocks shape aggregate productivity in Europe. This paper provides evidence that several regions play a significant role as common factors in the production function of almost every other region. We provide a procedure to identify and test these regions through inter-regional trade flows. In our estimations, the ten most pervasive regions out of 272 NUTS 2 regions explain about 12% of the total factor productivity growth in the EU-28 countries. Significant heterogeneity exists in the region’s ability to absorb imported knowledge among these countries. Local knowledge stock’s contribution is limited compared to imported knowledge due to a regional disparity in R&D distribution. Our work contributes to understanding the granular features of spatial macroeconomics, with a particular focus on inter-regional trade flows and knowledge spillovers.