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The relationship between capacity utilization and inflation

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  • Michael Dotsey
  • Tom Stark

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.

Suggested Citation

  • Michael Dotsey & Tom Stark, 2005. "The relationship between capacity utilization and inflation," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 8-17.
    • Handle: RePEc:fip:fedpbr:y:2005:i:q2:p:8-17
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2005/q2/Q2_05_Dotsey_Stark.pdf
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    References listed on IDEAS

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    1. 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).
    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.
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    Cited by:

    1. Camila Figueroa & Jorge Fornero & Pablo García, 2019. "Hindsight vs. Real time measurement of the output gap: Implications for the Phillips curve in the Chilean Case," Working Papers Central Bank of Chile 854, Central Bank of Chile.
    2. Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Dec), pages 19-38.
    3. Michael Dotsey & Shigeru Fujita & Tom Stark, 2018. "Do Phillips Curves Conditionally Help to Forecast Inflation?," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 43-92, September.
    4. Ramesh Chandra Das & Tonmoy Chatterjee & Enrico Ivaldi, 2024. "Revisiting policy combinations under IS–LM–EE framework introducing capacity utilization," Quality & Quantity: International Journal of Methodology, Springer, vol. 58(1), pages 903-932, February.
    5. Theologos Dergiades & Lefteris Tsoulfidis, 2007. "A New Method For The Estimation Of Capacity Utilization: Theory And Empirical Evidence From 14 Eu Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 59(4), pages 361-381, October.
    6. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
    7. Mohieddine Rahmouni, 2021. "Determinants of capacity utilisation by firms in developing countries: evidence from Tunisia," International Journal of Technological Learning, Innovation and Development, Inderscience Enterprises Ltd, vol. 13(3), pages 212-245.

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