The impact of excess capacity on the investment falloff

PÉREZ ARTICA, RODRIGO

Buenos Aires

Congreso; Young Scholar Initiative Regional Covening; 2018

Institute for New Economic Thinking

A widespread decline in the rate of capacity utilization in the US manufacturing industry during the last decades is documented, which parallels a worsening trend of gross capital formation. Several exploratory exercises are conducted 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 average investment decline over the whole period considered. Finally, firm-level data is used to control for other investment determinants. The relationship remains statistically and economically relevant. In addition, a relationship between past accumulated utilization variation and current investment is found, suggesting that excess capacity might be a relevant force behind current investment weakness.