Excess capacity and hysteresis in EU Countries. A structural approach

Federico Bassi

Structural Change and Economic Dynamics, 2024, vol. 71, issue C, 116-134

Abstract: We develop a structural method to estimate the rate of capacity utilization in 12 EU countries that consists of identifying the structural parameters of a Leontief production function, using a parsimonious theoretical specification. Parameters are correctly identified, stable and robust to alternative specifications. Our results provide evidence of persistent excess capacity and hysteresis in the rate of capacity utilization in many EU countries, especially after the 2008′s global financial crisis, thereby supporting the claim that larger fiscal deficits would have contributed to absorb excess capacity without producing persistent inflationary pressures or debt unsustainability. Despite the simplicity of our model, the method allows more complex macroeconomic specifications for country-specific applications.

Keywords: Excess capacity; Hysteresis; Potential output; Output gap (search for similar items in EconPapers)
JEL-codes: C51 E22 E32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:71:y:2024:i:c:p:116-134

DOI: 10.1016/j.strueco.2024.07.002

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