On the utilization controversy in the demand-led growth literature: A quantile unit root approach

The demand-led growth literature is embroiled in a controversy surrounding the long-run stationarity of capacity utilization. One perspective posits that a non-stationary rate of capacity utilization implies its endogeneity to aggregate demand, aligning with the neo-Kaleckian model. In contrast, an opposing viewpoint suggests the possibility of long-run stability independent of demand fluctuations. Conventional empirical approaches generally support the latter viewpoint. This study proposes a novel way to estimate capacity utilization persistence by using a quantile autoregression (QAR) model, which allows for the possibility that shocks of different signs and magnitudes impact capacity utilization differently. Using official survey measures from developed and developing countries, we find evidence in favor of local unit root tendencies, with recessions exhibiting persistent effects on utilization. Additionally, we identify an asymmetric capacity utilization response, where, in general, recessive shocks are persistent while positive shocks are transitory. These results provide a fresh perspective on how capacity utilization responds to different economic conditions.