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The relationship between capacity utilization and inflation

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  • Michael Dotsey
  • Thomas Stark
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    Abstract

    There's a common belief among economists that when there’s slack in the economy — that is, when labor and capital are not fully employed — the economy can expand without an increase in inflation. One measure of the intensity with which labor and capital are used in producing output is the capacity utilization rate. According to some economists, when capacity utilization is low, firms can increase employment and their use of capital without incurring large increases in the costs of production. So firms will not be forced to raise prices in order to make profits on additional output. But this theory is not universally accepted. In “The Relationship Between Capacity Utilization and Inflation,” Mike Dotsey and Tom Stark investigate some of the problems with what, at first glance, seems a compelling story.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2005/q2/Q2_05_Dotsey_Stark.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (2005)
    Issue (Month): Q2 ()
    Pages: 8-17

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    Handle: RePEc:fip:fedpbr:y:2005:i:q2:p:8-17

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    Related research

    Keywords: Inflation (Finance) ; Industrial capacity;

    References

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    1. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 189-236 National Bureau of Economic Research, Inc.
    2. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Apr).
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    Cited by:
    1. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    2. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.

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