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Do news shocks increase capital utilization?

Jinhee Woo

Economic Modelling, 2020, vol. 91, issue C, 128-137

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.

Keywords: News shock; Investment; Capital utilization; Fixed cost of capital adjustment (search for similar items in EconPapers)
JEL-codes: C22 E22 E32 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.06.012

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