Capacity utilization, investment and consumer demand: Evidence from 28 manufacturing industries using PVAR

The dynamic relationship among investment, capacity utilization and consumer demand is discussed in this paper, using data from 28 Chinese manufacturing industries combined with vector auto regression model. Based on the generalized method of moments (GMM) estimation to get parameter values of panel VAR model, We find that response of investment to capacity utilization is positive by using impulse response functions of these two variables. After adding factor of consumer demand, impulse response functions of three variables show that the shock of consumer demand will increase capacity utilization and thus the investment which means strong consumer demand is the basis of large-scale investment.