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Hysteresis in the normal rate of capacity utilization: a behavioural explanation

Mark Setterfield () and Joana David Avritzer ()
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Joana David Avritzer: Department of Economics, New School for Social Research

No 1907, Working Papers from New School for Social Research, Department of Economics

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 behavioural 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 behavioural foundation for hysteresis in the normal rate of capacity utilization.

Keywords: Normal rate of capacity utilization; Harrodian instability; hysteresis; Kaleckian growth theory (search for similar items in EconPapers)
JEL-codes: E11 E12 O41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2019-06
New Economics Papers: this item is included in nep-gro, nep-mac and nep-pke
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