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The Impact of Excess Capacity on the Investment Falloff

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  • Rodrigo Pérez Artica

Abstract

I documented a widespread decline in the rate of capacity utilization in the US manufacturing industry during the last decades, which parallels a worsening trend of gross capital formation. I conducted several exploratory exercises to investigate whether utilization rates were actually related to the investment performance during 1952-2014. Vector auto-regressive estimates imply a non-trivial quantitative relationship between utilization rates and investment, which accounts for a decline equivalent to more than 30% of the average investment falloff over the whole period considered. Finally, I used firm-level data to control for other investment determinants. The relationship remains statistically and economically significant. In addition, I found a link between past accumulated utilization variation and current investment, suggesting that excess capacity could be a relevant force behind current investment weakness. JEL: E20, E22. Keywords: Investment, Capacity utilization.

Suggested Citation

  • Rodrigo Pérez Artica, 2023. "The Impact of Excess Capacity on the Investment Falloff," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 70(3), pages 403-428.
  • Handle: RePEc:voj:journl:v:70:y:2023:i:3:p:403-428:id:1742
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    More about this item

    Keywords

    Investment; Capacity utilization;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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