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Growth without Full Capacity Utilization And Full Capacity Utilization Without Growth

Author

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  • Federico Bassi

    () (Centre d'Economie de l'Université de Paris Nord (CEPN))

Abstract

Despite empirical evidence of permanent damages to GDP after the 2008 global financial crisis, there is little theoretical consensus about the impact of the crisis on the unobservable rate of capacity utilization. In this paper, we investigate how the rate of capacity utilization reacts to shocks by testing the hypothesis that the normal rate of capacity utilization is exogenous and constant, against the alternative hypothesis that it is endogenous to demand and can vary with time. We find that the normal rate is more likely to be a shifting attractor or a time-varying trend instead of a fixed center of gravity. Hence, temporary shocks do not necessarily translate into permanent losses of productive capacity but they can also translate into lower degrees of utilization of the capacity in place. We show indeed that the effects of the 2008 financial crisis on EU countries were highly heterogeneous, and we find three different trajectories. A first cluster of countries recovered the pre-crisis rate of capacity utilization and accumulation, despite a permanent destruction of productive capacity. A second cluster of countries absorbed the shock through a lower rate of capacity utilization and accumulation with no permanent destruction of productive capacity; a third cluster of countries absorbed the shock through a massive destruction of productive capacity and a negative rate of growth, despite an increasing rate of utilization.

Suggested Citation

  • Federico Bassi, 2020. "Growth without Full Capacity Utilization And Full Capacity Utilization Without Growth," CEPN Working Papers 2020-02, Centre d'Economie de l'Université de Paris Nord.
  • Handle: RePEc:upn:wpaper:2020-02
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    Cited by:

    1. Federico Bassi, 2020. "Chronic Excess Capacity and Unemployment Hysteresis in EU Countries. A Structural Approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def091, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

    More about this item

    Keywords

    Normal rate of capacity utilization; Hysteresis; Secular stagnation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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