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Hysteresis in the normal rate of capacity utilization: A behavioral explanation

Mark Setterfield and Joana David Avritzer

Metroeconomica, 2020, vol. 71, issue 4, 898-919

Abstract: Kaleckians describe a normal rate of capacity utilization that is subject to hysteresis effects. This means that the normal rate varies directly with the actual rate of capacity utilization, ensuring that steady‐state equilibrium conditions in the Kaleckian model are fully adjusted (the actual and normal rates of capacity utilization are equalized) but without this last condition implying that the rate of capacity utilization is constant in the long run. The relationship between distribution and growth unique to the Kaleckian model is, thus, preserved. The hysteresis mechanism has been criticized from various quarters, however, these criticisms focusing on its alleged lack of behavioral foundations. This paper shows that consistent with the stylized facts, variation in the normal rate of capacity utilization in response to variation in the actual capacity utilization rate can be derived from the links between both variables and the volatility of the macroeconomic environment—volatility, in the presence of fundamental uncertainty, being an important reason why firms deliberately under‐utilize capacity (even in the long run) in the first place. The result is an empirically grounded behavioral foundation for hysteresis in the normal rate of capacity utilization.

Date: 2020
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