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Long-run variation in capacity utilization in the presence of a fixed normal rate

Mark Setterfield ()

No 1704, Working Papers from New School for Social Research, Department of Economics

Abstract: We develop a generic Kalecki-Robinson model of growth that, subject to different closures, illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run. The closures are shown to have different implications for the behaviour of the rate of capacity utilization and hence whether and how the economy achieves a “fully-adjusted position” (equalization of the actual and normal rates of capacity utilization). Assuming that the normal rate of capacity utilization is exogenously fixed, it is then shown that variation in the actual capacity utilization rate can nevertheless occur – at least within limits – without triggering “Harrodian instability”. This result emanates from a discontinuity in the investment function that is grounded in Harrod’s own macrodynamics, so that it is ultimately the combination of Harrodian and Kaleckian dynamics that gives rise to long-run variations in the actual rate of capacity utilization in the presence of a fixed normal rate. Aggregate and industry-level US capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering Harrodian instability. A key finding is that the conditions necessary for the latter appear to be relatively rare.

Keywords: Normal rate of capacity utilization; Harrodian instability; Kaleckian growth theory (search for similar items in EconPapers)
JEL-codes: E11 E12 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pke
Date: 2017-02
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http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_042017.pdf First version, 2017 (application/pdf)

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Journal Article: Long-run variation in capacity utilization in the presence of a fixed normal rate (2019) Downloads
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