The Response of Capital Goods Shipments to Demand Over the Business Cycle
36 Pages Posted: 10 May 2012
Date Written: May 7, 2012
This paper studies the behavior of producers of capital goods, examining how they set shipments in response to fluctuations in new orders. The paper establishes a stylized fact: the response of shipments to orders is more pronounced when the level of new orders is low relative to the level of shipments, usually after orders plunge in recessions. This cyclical change in firm behavior is quantitatively important, accounting for a large portion of the steep decline in equipment investment in the 2001 and 2007 -- 9 recessions. We examine economic interpretations of this stylized fact using a model where firms smooth production with a target delivery lag for new orders. Heightened persistence in orders growth may explain part of the greater responsiveness of shipments to orders, as may increases in firms' target buffer stocks of unfilled orders relative to shipments.
Keywords: Orders, shipments, business investment, business cycles, threshold cointegration models, Markov switching models
JEL Classification: E22, E23, E32
Suggested Citation: Suggested Citation