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Capacity Utilisation in Irish Manufacturing

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  • Kenny, Geoff

    (Central Bank and Financial Services Authority of Ireland)

Abstract

Capacity Utilisation (CU) measures play an important role in practical economic analysis. Variation in the extent to which existing capacity is being utilised provides an indication of how the supply side of a particular industry, sector or economy is evolving relative to its demand side. Such measures have been used to explain changes in investment flows and the general economic environment. However, the primary significance of CU measures stems from their usefulness in uncovering upward pressure on the price level (i.e. inflation). This paper reviews some of the more common methods of calculating measures of capacity utilisation. All methods are shown to have their own specific advantages and disadvantages. The available monthly survey measures are currently the most accessible and perhaps the most useful from a policy viewpoint given the high frequency with which they become available. However, there is a large degree of uncertainty about what these surveyed measures actually mean. The paper has also applied the recently popularised cost function approach to measuring CU. In recognition of the dichotomy which characterises Irish industry, the model was also fitted to two individual sub-sector classifications: Hi-technology and Traditional manufacturing. The results suggest that a substantial degree of excess capacity existed in Irish manufacturing between 1970 and 1990. The constructed CU measure is also examined as a possible indicator of inflationary pressure. No significant relationship between CU and inflation was found in either the Total or Hi-Technology sectors. However, the CU ratio for the Traditional sector was found to be significantly positively related to Irish inflation.

Suggested Citation

  • Kenny, Geoff, 1996. "Capacity Utilisation in Irish Manufacturing," Research Technical Papers 2/RT/96, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:2/rt/96
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    References listed on IDEAS

    as
    1. Kearney, Ide, 1991. "The Computerised Databank of the CII/ESRI Monthly Business Survey Data," Papers TP06, Economic and Social Research Institute (ESRI).
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    Cited by:

    1. Quinn, Terry & Kenny, Geoff & Meyler, Aidan, 1999. "Inflation Analysis: An Overview," Research Technical Papers 1/RT/99, Central Bank of Ireland.
    2. John K. Ashton, 2003. "Capital Utilisation and Scale in the English and Welsh Water Industry," The Service Industries Journal, Taylor & Francis Journals, vol. 23(5), pages 137-149, November.
    3. Renata Grzeda Latocha & Gernot Nerb, 2004. "Modelling Short-term Interest Rates in the Euro Area Using Business Survey Data," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2004(1), pages 43-69.
    4. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation In Ireland (Part 2)," Research Technical Papers 3B/RT/96, Central Bank of Ireland.
    5. Slevin, Geraldine, 2001. "Potential Output and the Output Gap in Ireland," Research Technical Papers 5/RT/01, Central Bank of Ireland.

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