The Response of Capital Goods Shipments to Demand Over the Business Cycle

36 Pages Posted: 10 May 2012

See all articles by Jeremy Nalewaik

Jeremy Nalewaik

Board of Governors of the Federal Reserve System

Eugenio Pinto

Board of Governors of the Federal Reserve System

Date Written: May 7, 2012

Abstract

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

Nalewaik, Jeremy John and Pinto, Eugenio, The Response of Capital Goods Shipments to Demand Over the Business Cycle (May 7, 2012). FEDS Working Paper No. 2012-30. Available at SSRN: https://ssrn.com/abstract=2055323 or http://dx.doi.org/10.2139/ssrn.2055323

Jeremy John Nalewaik (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Eugenio Pinto

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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