Nondurable Goods Sector Research Articles

An Empirical Study on the Impact of Fed Rate Hikes: Perspective from Fama-French Three-Factor Model

The Fed’s interest rate hike is currently a hot issue of social concern. Some researchers believe that the Fed's rate hike this time is an "urgent cycle" rather than a "long-term cycle". However, there is still no unified explanation for the formation mechanism and scope of influence behind it. Therefore, this paper collects the return data of the US stock industry and conducts a Fama-French three-factor regression analysis. Research shows that the short-term negative impact of the U.S. stock market in the context of the Fed raising interest rates is not conducive to the development of the U.S. stock market, meanwhile, the energy industry benefits from the hike on the long term. The fed rate hike will have a negative impact on the rest of the industry in the short term, with the durable goods sector and business equipment sector having the most severe impact, and the utility sector and non-durable goods sector having a relatively small negative impact.

Heterogeneity in Manufacturing Growth Risk

We analyze output growth risk with respect to financial conditions across U.S. manufacturing industries. Using a multi-level quantile regression approach, we find strong heterogeneity in growth risk, particularly between the more vulnerable durable goods sector and the more resilient nondurable goods sector. Moreover, we show that industry characteristics significantly explain these differences. Large, or material intensive durable goods producing, or energy intensive nondurable goods producing industries are more vulnerable to adverse financial conditions, while industries engaging in labor hoarding, or with a high capital or overhead labor intensity are less susceptible.

Adjustment costs and threshold effects in factor demand relationships

ABSTRACTIt has been recently argued that producers may not respond to every input price change in the way that a linear factor demand model would predict. This lumpy response is due to adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. This study aims to provide a solid conceptual framework for these nonlinearities in factor demand relationships. Industry-specific implications of convex and non-convex adjustment costs for the linearity of the factor demand relationships as well as price and substitution elasticities are explored. A two-regime threshold system of factor demand equations is estimated for several manufacturing industries in the United States. Empirical results suggest significant threshold effects in the factor demand relationships in most nondurable goods sectors. The size and the nature of thresholds depend upon industry characteristics, including input composition and (non)convexity of underlying adjustment costs. Complete matrices of price and substitution elasticities for each industry are derived using estimates of threshold factor demand systems. Discussion of two contrasting cases in greater detail sheds light on how the effect of price shocks on factor demand relationships varies across industries with different adjustment cost structures.

Durable Goods, Inflation Risk, and Equilibrium Asset Prices

High expected inflation is known to predict low future real growth. We show that, relative to nondurable goods sectors of the economy, such predictability is significantly more pronounced in durable sectors. Consistent with this macroeconomic evidence, the equity returns of durable goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a two-good recursive utility model that features persistent growth fluctuations and inflation nonneutrality for durable and nondurable consumption. Our model can quantitatively account for the levels and volatilities of bond and equity prices, and correlations of equity returns with bond returns and with expected inflation. Received January 25, 2012; accepted July 13, 2015 by Editor Geert Bekaert.

Do producers respond to every input price change? A note on nonlinearities in factor demand systems

Factor demand relationships, as they are represented by parameters of the cost function, are generally assumed to be linear (in the parameters) in the existing empirical literature. In this note, we argue that this might not always be true, because firms may incur adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. We estimate a two-regime threshold system of factor demand equations for several manufacturing industries in the United States. Our results suggest significant nonlinear effects in the factor demand relationships in most nondurable goods sectors. Failure to account for this threshold sensitivity to input price change may cause the estimates of price elasticities to be biased.

Durable Goods, Inflation Risk and the Equilibrium Term Structure

High expected inflation is known to have a negative impact on future real growth. We show that this effect is significantly more pronounced in durable relative to non-durable goods sectors of the economy. Consistent with this macroeconomic evidence, the equity returns of durable-goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a recursive utility model which features persistent growth fluctuations and inflation non-neutrality for durable and non-durable consumption. Our model can quantitatively account for the key moments of nominal bond prices and the levels, volatilities, and exposures of equity returns to expected inflation and bond returns.

On mergers, monetary policy and output durability

This article examines the causal relation between monetary policy decisions and the variation in the US mergers and acquisitions (M&A) activity in the durable and nondurable goods sectors between 1990 and 2013. The deviation of the monetary policy-set federal funds rate from the natural interest rate estimated by Laubach and Williams (2003) is shown to have significant causal effects on the M&A activity. In the nondurable goods sector, the funds rate’s deviation from the natural rate, rather than the funds rate itself, is the main macroeconomic factor influencing the M&A activity. In the durable goods sector, the variation in the funds rate, only when this rate is significantly below the natural one, is the main macroeconomic factor influencing the M&A activity. Setting the funds rate below the natural rate reflecting long-term fundamentals (a) leads to relatively lower financing costs which, in turn, lead companies to favour M&A relative to internal growth and (b) makes the M&A activity in the durable goods sector, which is sensitive to the variation in the cost of capital, highly dependent on the monetary policy-set rate.

WHAT DO WORKING CAPITAL AND HABIT TELL US ABOUT THE CO-MOVEMENT PROBLEM?

Empirical studies find that expenditures on both durable and nondurable goods fall following a contractionary monetary policy shock. However, in standard two-sector models with staggered nondurable goods prices and flexible durable goods prices, consumption of durables rises whereas that of nondurables falls in response to a contractionary policy shock. To resolve this co-movement problem, I extend the model to include a realistic financial friction that firms must pay for their productive inputs prior to production, i.e., working capital, along with habit formation in nondurable goods consumption. Following a positive interest rate shock, the working capital channel raises production costs, thereby discouraging production of both durable and nondurable goods. Furthermore, habit formation induces households to smooth the growth rate of nondurable goods consumption, and hence mitigates the fall in the nondurable goods sector. The model solves the co-movement problem and successfully generates a more sensitive response in the durable goods sector, as observed in the data.

Housing, Wealth Effects, and Monetary Policy

This paper examines the role that wealth effects on labour supply play in a two-sector sticky-price model that includes non-durables and housing. Careful analysis of a two-sector sticky-price model reveals that whether there are wealth effects on labour supply fundamentally changes the nature of the model in a way that has not been fully appreciated. In the presence of wealth effects on labour supply, as Barsky et al. study demonstrate, the pricing of housing is central to the behaviour of the model, whereas price rigidity in the non-durable goods sector is much less important. In the absence of these wealth effects, by contrast, the behaviour of the model depends critically on whether the non-durable goods, not the new housing, themselves have sticky prices.

Household Production, Services and Monetary Policy

A distinctive feature of market-provided services is that some of them have close substitutes at home. Households may therefore switch between consuming home and market services in response to changes in the real wage - the opportunity cost of working at home - and changes in the price of market services. In order to analyze and quantify the implications of this trade-off for monetary policy, I embed a household sector into an otherwise standard sticky price DSGE model, which I calibrate to the U.S. economy. The results of the model are twofold. At the sectoral level, household production augments the service sector's New Keynesian Phillips curve with a sizable extra component that co-moves negatively with the output gap term, lowering the incentive of service sector firms to change their prices. This mechanism endogenously amplifies the real effects of a monetary shock in that sector, unlike in the nondurable goods sector for which households cannot manufacture substitutes at home. At the aggregate level, household production also implies more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock. Some empirical support for this theory is provided.

Household Production, Services and Monetary Policy

A distinctive feature of market-provided services is that some of them have close substitutes at home. Households may therefore switch between consuming home and market services in response to changes in the real wage - the opportunity cost of working at home - and changes in the price of market services. In order to analyze and quantify the implications of this trade-off for monetary policy, I embed a household sector into an otherwise standard sticky price DSGE model, which I calibrate to the U.S. economy. The results of the model are twofold. At the sectoral level, household production augments the service sector's New Keynesian Phillips curve with a sizable extra component that co-moves negatively with the output gap term, lowering the incentive of service sector firms to change their prices. This mechanism endogenously amplifies the real effects of a monetary shock in that sector, unlike in the nondurable goods sector for which households cannot manufacture substitutes at home. At the aggregate level, household production also implies more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock. Some empirical support for this theory is provided.

The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry

This paper, considering revenue and cost exposure channels, investigates the effects of exchange rate on fixed capital investment in Mexican manufacturing sector over 1994–2003. We find that i) currency depreciation has a positive (negative) effect on fixed investment through the export (import) channel; ii) exchange rate volatility impacts mostly export oriented sectors; iii) the sensitivity of investment to exchange rate movements is stronger in non-durable goods sectors and industries with low mark-up ratios.

O mecanismo de transmissão da política monetária no Brasil: uma análise em VAR por setor industrial

Este artigo analisa o impacto de choques monetarios nas principais variaveis macroeconomicas e no produto de setores industriais, no Brasil, entre 1999 e 2008. E utilizada a metodologia de modelos VAR, pela abordagem de Toda & Yamamoto (1995), e funcoes de impulso-resposta. Verificou-se robustez dos modelos e efetividade da politica monetaria no periodo. Os setores industriais respondem negativamente a politica monetaria exogena, mas com diferenca no nivel do efeito. Os setores de bens de consumo duraveis apresentam a maior resposta, os de bens de demanda industrial uma reacao intermediaria, e o de bens de consumo nao duraveis a menor resposta.

Are Markets Perfectly Competitive in the Long Run? Market Power, Factor Utilization and Adjustment Costs in US Manufacturing

Some firms outperform others. This paper presents a methodology that uses publicly available data to assess short-run and long-run drivers of corporate performance. Using tools developed in macroeconomics, this paper first asks: Do the conventional assumptions of perfect competition and constant returns to scale hold in the long run? Measuring the markup of price over marginal cost, we find evidence of persistent markups in an extensive panel of US publicly traded manufacturing firms over a thirty-year period (1965-1995). While the estimated markup varies considerably across industries, in a majority of industries in our sample, the estimated markup is positive. We then divide the sample into durable and non-durable goods sectors. On average, industries in the durable goods sector exhibit a modest markup of 3%. In contrast, we find evidence of substantial market power/increasing returns among industries in the non-durable goods sector, where we find an average markup of 11%. Second, this paper measures short-run changes in allocative efficiency, which can create quasi-rents arising from short-run rigidities in factor markets. We explicitly consider cyclical factor utilization and adjustment costs which may dampen (or boost) a firm's performance. We find that these cyclical factors are real and play an important role in explaining performance differences among firms.

Investment-specific technological change and labor composition: Evidence from the U.S. manufacturing

This paper examines the impact of investment-specific technological change on labor composition in U.S. manufacturing industries from 1974 to 1994. I show that investment-specific technological change increases the relative demand of non-production workers to production workers, while TFP growth does not change labor composition. Moreover, I find that the demand of skilled labor is stronger in the durable goods sector whereas the deskilling effect is stronger in the non-durable goods sector.

On the choice of production functions: the case of US manufacturing industries

A new CES (Bairam, 1989, 1991) production function that has the Cobb-Douglas and Leontief functions as special cases is considered and estimated. For the nondurable goods and durable-goods sectors in US manufacturing, the translog and CES functions cannot be estimated properly due to multicollinearity, whereas the Cobb-Douglas and new CES functions yield coefficients that have the correct sign and are significant at the 1% or 5% level. Both sectors exhibited increasing returns to scale, though the nondurable-goods sector is more efficient than the other sector. Although the Cobb-Douglas function cannot be rejected, the new CES functions has the maximized value of the log-likelihood function and the advantage that the variable output elasticity with respect to inputs can be tested.

Real wage response to monetary shocks: A disaggregated analysis

This paper presents a disaggregated analysis and investigates empirically the real wage response during the monetary cycle, using the disaggregated quarterly data for the U.S. manufacturing industry. I find, like Leiderman, a countercyclical real wage response during the monetary cycle. I also find that while both unanticipated and anticipated money changes have significant effects on the real wage in the durable goods sector, anticipated money changes do not affect the real wage in the nondurable goods sector. This sharply contrasts with the neutrality result and provides a new insight to the sectoral behavior of the real wages.