Reviewing demand regimes in open economies with Penn World Table data

Abstract

This paper uses the Penn World Table dataset to examine capacity utilization response to changes in the wage share in six developed countries from 1960 to 2019. Our vector autoregression model allows regression coefficients and volatilities to be time-varying in nature. A rolling window shows that capacity utilization response to the wage share is unstable. We find that a 1-standard deviation shock to the wage share generates a significant negative capacity utilization response in the U.S. and U.K. However, a rise in the wage share decreases capacity utilization of the remaining sample countries only conditional on exogenous wage share changes.