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Is there a stable relationship between capacity utilization and inflation?

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  • Kenneth M. Emery
  • Chih-Ping Chang
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    Abstract

    Many policymakers and financial market participants use the Federal Reserve's industrial capacity utilization rate as an indicator of future changes in inflation. During the past few years, however, the usefulness of the utilization rate as an inflation indicator has come under scrutiny. ; In this article, Kenneth Emery and Chih-Ping Chang examine capacity utilization's power to predict changes in inflation, with a focus on whether the relationship is stable over time. They find that while there was a positive forecasting relationship between capacity utilization and changes in consumer price inflation before 1983, this relationship has substantially weakened since the end of 1982. In fact, after 1982 there is no evidence that high capacity utilization rates predict increases in consumer price inflation. Although the results are similar for changes in producer price inflation, the deterioration in the relationship is not as severe. So there is still some evidence that, after 1982, capacity utilization helps to predict changes in producer price inflation.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1997/er9701b.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1997)
    Issue (Month): Q I ()
    Pages: 14-20

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    Handle: RePEc:fip:fedder:y:1997:i:qi:p:14-20

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    Related research

    Keywords: Industrial capacity ; Inflation (Finance);

    References

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    1. Franz, Wolfgang & Gordon, Robert J, 1993. "German and American Wage and Price Dynamics: Differences and Common Themes," CEPR Discussion Papers 777, C.E.P.R. Discussion Papers.
    2. Stephen G. Cecchetti, 1996. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
    3. repec:fip:feddse:y:1994:i:aug:p:1-4 is not listed on IDEAS
    4. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
    5. John V. Duca, 1996. "Inflation, unemployment, and duration," Working Papers 9603, Federal Reserve Bank of Dallas.
    6. Mary G. Finn, 1995. "Is "high" capacity utilization inflationary?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-16.
    7. Nathan S. Balke & Kenneth M. Emery, 1994. "Understanding the price puzzle," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 15-26.
    8. Evan F. Koenig & Mark A. Wynne, 1994. "Is there an output-inflation trade-off?," Southwest Economy, Federal Reserve Bank of Dallas, issue Aug, pages 1-4.
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    Cited by:
    1. Thomas M Fullerton Jr & Eiichi Araki, 2004. "A Theoretical Model of Industrial Economy Inflationary Dynamics," Macroeconomics 0408007, EconWPA.
    2. Tsoulfidis, L. & Dergiades, Th., 2006. "The Inflation-Capacity Utilization Conundrum: Evidence from the Canadian Economy," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    3. Rudy Fichtenbaum, 2003. "Is there a natural level of capacity utilization?," Forum for Social Economics, Springer, vol. 33(1), pages 45-62, September.
    4. Thomas M Fullerton Jr, 2004. "A Theoretical Model of Developing Country Inflationary Dynamics," Macroeconomics 0407031, EconWPA.
    5. Nienke Oomes & Oksana Dynnikova, 2006. "The Utilization-Adjusted Output Gap," IMF Working Papers 06/68, International Monetary Fund.
    6. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.

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