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Is there a stable relationship between capacity utilization and inflation?

Author

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  • Kenneth M. Emery
  • Chih-Ping Chang

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.

Suggested Citation

  • Kenneth M. Emery & Chih-Ping Chang, 1997. "Is there a stable relationship between capacity utilization and inflation?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 14-20.
  • Handle: RePEc:fip:fedder:y:1997:i:qi:p:14-20
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1997/er9701b.pdf
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    References listed on IDEAS

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    1. Franz, Wolfgang & Gordon, Robert J., 1993. "German and American wage and price dynamics : Differences and common themes," European Economic Review, Elsevier, vol. 37(4), pages 719-754, May.
    2. 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.
    3. 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.
    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. Duca, John V., 1996. "Inflation, unemployment, and duration," Economics Letters, Elsevier, vol. 52(3), pages 293-298, September.
    6. repec:fip:feddse:y:1994:i:aug:p:1-4 is not listed on IDEAS
    7. 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.
    8. Mary G. Finn, 1995. "Is "high" capacity utilization inflationary?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-16.
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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. 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.
    3. Rudy Fichtenbaum, 2003. "Is there a natural level of capacity utilization?," Forum for Social Economics, Springer;The Association for Social Economics, vol. 33(1), pages 45-62, September.
    4. Nienke Oomes & Oksana Dynnikova, 2006. "The Utilization-Adjusted Output Gap; Is the Russian Economy Overheating?," IMF Working Papers 06/68, International Monetary Fund.
    5. Thomas M Fullerton Jr, 2004. "A Theoretical Model of Developing Country Inflationary Dynamics," Macroeconomics 0407031, EconWPA.
    6. 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).

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    Keywords

    Industrial capacity ; Inflation (Finance);

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