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Do news shocks increase capital utilization?

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  • Woo, Jinhee

Abstract

Using the workweek of capital as a measure of capital utilization, we empirically test whether news shocks actually increase capital utilization. To this end, by estimating a panel VAR on two-digit manufacturing data identifying news shocks as innovations to stock returns orthogonal to the variations in current-period TFP growth, we find the positive response of capital utilization to news shocks. Moreover, to explain the positive response of capital utilization to news shocks in terms of plant-level investment behavior, we propose a heterogeneous plant model that combines the fixed cost of capital adjustment and an endogenous capital utilization choice. With the presence of fixed costs, except for the plants that have recently adjusted capital stock, news shock shortens the effective time horizon of currently installed capital stock and increases capital utilization. When the model economy is calibrated to match the salient features of the plant-level investment rate distribution, the economy generates a news-driven positive response of capital utilization.

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  • Woo, Jinhee, 2020. "Do news shocks increase capital utilization?," Economic Modelling, Elsevier, vol. 91(C), pages 128-137.
    • Handle: RePEc:eee:ecmode:v:91:y:2020:i:c:p:128-137
    DOI: 10.1016/j.econmod.2020.06.012
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    More about this item

    Keywords

    News shock; Investment; Capital utilization; Fixed cost of capital adjustment;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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