SAFE Working Paper No. 388

Uncertainty, Risk, and Capital Growth

We nd that high macroeconomic uncertainty is associated with greater accumulation

of physical capital, despite a reduction in investment and valuations. To reconcile

this puzzling evidence, we show that uncertainty predicts lower depreciation and utilization

of existing capital, which dominates the investment slowdown. Motivated by

these dynamics, we develop a quantitative production-based model in which rms implement

precautionary savings through reducing utilization rather than raising investment.

Through this novel intensive-margin mechanism, uncertainty shocks command

a quarter of the equity premium in general equilibrium, while

exibility in utilization

adjustments helps explain uncertainty risk exposures in the cross-section of industry