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Capacity Utilization and the Dynamics of Business Cycle Fluctuations

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Abstract

We perform an empirical evaluation of the role of capacity utilization in business cycle fluctuations. We first document the relation between capacity utilization and business cycle fluctuations in historical data and then verify whether these empirical features can be explained by a dynamic general equilibrium environment with variable rates of capacity utilization and realistic stochastic processes for the model's forcing variables. In this evaluation, we use two measures of the business cycle: output growth and the cyclical component of output. We find that, for both historical data and our theoretical economy, capacity utilization is procyclical, a coincident indicator of the cyclical component of output, but a lagging indicator of the growth rate of output. We also find that capacity utilization is much more correlated with the cyclical component of output than with output growth. Nous entreprenons une évaluation empirique du rôle de l'utilisation de la capacité dans les fluctuations économiques. Nous commençons par documenter la relation entre l'utilisation de la capacité et les fluctuations dans les données historiques puis vérifions si ces régularités empiriques peuvent être expliquées par un modèle d'équilibre général avec des taux de capacité d'utilisation variables et des processus stochastiques réalistes pour les variables exogènes. Dans cette évaluation, nous utilisons deux mesures du cycle: la croissance de la production et la composante cyclique de la production. Nous trouvons que, tant pour les données historiques que notre modèle, l'utilisation de la capacité est procyclique, est un indicateur coïncident de la production, mais un indicateur retardé du taux de croissance de la production. Nous trouvons également que l'utilisation de la capacité est beaucoup plus corrélée avec les composantes cycliques qu'avec le taux de croissance.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 92.

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Length: 38 pages
Date of creation: Sep 1999
Date of revision:
Handle: RePEc:cre:crefwp:92

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Keywords: Real business cycles; trend-cycle decomposition; business cycle indicators;

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References

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  1. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  2. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
  3. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  5. Martin Boileau & Michel Normandin, 1997. "Aggregate Employment, Real Business Cycles, and Superior Information," Cahiers de recherche CREFE / CREFE Working Papers 55, CREFE, Université du Québec à Montréal.
  6. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  7. Carol Corrado & Joe Mattey, 1997. "Capacity Utilization," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 151-167, Winter.
  8. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  9. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  10. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  11. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  12. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
  13. Robert G. King & Mark W. Watson, 1995. "Money, prices, interest rates and the business cycle," Working Paper Series, Macroeconomic Issues 95-10, Federal Reserve Bank of Chicago.
  14. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
  15. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  16. Matthew D. Shapiro, 1989. "Assessing the Federal Reserve's Measures of Capacity and Utilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 181-242.
  17. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, April.
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Cited by:
  1. Correa, Paulo & Dayoub, Mariam & Francisco, Manuela, 2007. "Identifying supply-side constraints to export performance in Ecuador : an exercise with Investment Climate Survey data," Policy Research Working Paper Series 4179, The World Bank.
  2. Ziv Chinzara & Radhika Lahiri & En Te chen, 2012. "Financial Globalisation and Sectoral Reallocation of Capital in South Africa," School of Economics and Finance Discussion Papers and Working Papers Series 286, School of Economics and Finance, Queensland University of Technology.

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