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How Large Are Returns to Scale in the U.S.? A View Across the Boundary

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  • Thomas A. Lubik

Abstract

There is considerable disagreement in the empirical macro literature as to the degree of returns to scale in U.S. output. While many studies find evidence of a small degree of increasing returns, standard errors are typically large. This issue is of importance for assessing the possibility of equilibrium indeterminacy and sunspot-driven business cycles. The theoretical literature has shown that even small degrees of increasing returns can lead to non-uniqueness. Whereas earlier studies are based on production function regressions and single equation methods, this paper takes a structural and general equilibrium perspective. I argue that the question of indeterminacy is a property of a system and cannot be conclusively answered by single equation methods. I therefore estimate a canonical business cycle model for the U.S. economy including variable factor utilization. Based on the methodology developed by Lubik and Schorfheide (2004) I use Bayesian methods to estimate the model over the entire parameter space, allowing for sunspot equilibria generated by increasing returns to scale in production. I find that returns to scale are increasing, but not considerably so. However, I do not find evidence of indeterminacy. When abstracting from variable capital utilization, estimates of the scale parameter increase, but again indeterminacy can be rejected. This paper therefore suggests that increasing returns to scale are not the source for sunspot fluctuations in U.S. business cycles

Suggested Citation

  • Thomas A. Lubik, 2004. "How Large Are Returns to Scale in the U.S.? A View Across the Boundary," Computing in Economics and Finance 2004 280, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:280
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    References listed on IDEAS

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    1. Bennett, Rosalind L. & Farmer, Roger E. A., 2000. "Indeterminacy with Non-separable Utility," Journal of Economic Theory, Elsevier, vol. 93(1), pages 118-143, July.
    2. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
    3. Laitner, John & Stolyarov, Dmitriy, 2004. "Aggregate returns to scale and embodied technical change: theory and measurement using stock market data," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 191-233, January.
    4. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
    5. Lubik, Thomas A., 2016. "How Large Are Returns to Scale in the U.S.? A View Across the Boundary," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 79-103.
    6. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    7. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
    8. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-1174, December.
    9. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-283, April.
    10. Fabio Canova, 2009. "What Explains The Great Moderation in the U.S.? A Structural Analysis," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 697-721, June.
    11. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
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    1. Lubik, Thomas A., 2016. "How Large Are Returns to Scale in the U.S.? A View Across the Boundary," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 79-103.

    More about this item

    Keywords

    Indeterminacy; Increasing Returns to Scale; Bayesian Estimation;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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