EconPapers    
Economics at your fingertips  
 

Capacity Utilization and the NAIRCU

Federico Bassi ()

CEPN Working Papers from HAL

Abstract: Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless , available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment , labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods. Abstract Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless, available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment, labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods.

Keywords: Capacity utilization; NAIRCU; Potential GDP; Hysteresis; Secular stagnation (search for similar items in EconPapers)
Date: 2019-11-12
New Economics Papers: this item is included in nep-ets, nep-mac and nep-mon
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02360456
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://hal.archives-ouvertes.fr/hal-02360456/document (application/pdf)

Related works:
Working Paper: Capacity Utilization and the NAIRCU (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:cepnwp:hal-02360456

Access Statistics for this paper

More papers in CEPN Working Papers from HAL
Bibliographic data for series maintained by CCSD ().

 
Page updated 2022-06-11
Handle: RePEc:hal:cepnwp:hal-02360456