Activity Levels and the Flexibility of the Degree of Capacity Utilisation in the US

Abstract

ABSTRACT In recent years, a revival of the so-called ‘utilisation controversy’ has seen several scholars engage in a lively debate that still revolves around the same old question: what should we expect, beyond the short run, with regard to the degree of capacity utilisation? In this article, we tackle this issue by investigating the relationship between the level of economic activity and the ensuing utilisation of existing capacity. In order to assess the effect of the former on the latter and to provide a robust and clear picture of this phenomenon, we use a Structural VAR and Local Projection methodologies to estimate three alternative models, based on monthly data on the US economy. After presenting our empirical results, which point to only temporary effects on capacity utilisation of shocks to the level of economic activity, we verify their compatibility with alternative demand-led growth models. We conclude that autonomous demand-led models cum convergence towards normal utilisation perform better in terms of consistency with the econometric evidence, while the latter seems to call for a re-examination of ‘conventional’ versions of the Neo-Kaleckian model.