Growth without Full Capacity Utilization And Full Capacity Utilization Without Growth

Federico Bassi

No 2020-02, CEPN Working Papers from Centre d'Economie de l'Université de Paris Nord

Abstract: Despite empirical evidence of permanent damages to GDP after the 2008 global financial crisis, there is little theoretical consensus about the impact of the crisis on the unobservable rate of capacity utilization. In this paper, we investigate how the rate of capacity utilization reacts to shocks by testing the hypothesis that the normal rate of capacity utilization is exogenous and constant, against the alternative hypothesis that it is endogenous to demand and can vary with time. We find that the normal rate is more likely to be a shifting attractor or a time-varying trend instead of a fixed center of gravity. Hence, temporary shocks do not necessarily translate into permanent losses of productive capacity but they can also translate into lower degrees of utilization of the capacity in place. We show indeed that the effects of the 2008 financial crisis on EU countries were highly heterogeneous, and we find three different trajectories. A first cluster of countries recovered the pre-crisis rate of capacity utilization and accumulation, despite a permanent destruction of productive capacity. A second cluster of countries absorbed the shock through a lower rate of capacity utilization and accumulation with no permanent destruction of productive capacity; a third cluster of countries absorbed the shock through a massive destruction of productive capacity and a negative rate of growth, despite an increasing rate of utilization.

Keywords: Normal rate of capacity utilization; Hysteresis; Secular stagnation (search for similar items in EconPapers)
JEL-codes: C32 C51 E12 E22 E32 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Growth without Full Capacity Utilization And Full Capacity Utilization Without Growth (2020)
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