Is Capacity Utilization Variable in the Long Run? An Agent-Based Sectoral Approach to Modeling Hysteresis in the Normal Rate of Capacity Utilization

Federico Bassi,Mark Setterfield,Tom Bauermann,Dany Lang

doi:10.2139/ssrn.3623214

Abstract

ost Keynesian macrodynamic models make various assumptions about the normal rate of capacity utilization. Those rooted in the Classical and neo-Keynesian traditions assume the normal rate is fixed, whereas Kaleckian models treat it as a variable that is endogenous to the actual rate of capacity utilization. This paper contributes to the debate about the normal rate of capacity utilization by developing a model of strong or genuine hysteresis, in which firms make discrete decisions about the normal rate depending on the degree of uncertainty about demand conditions. An agent-based model based on empirical analysis of 25 sectors of the US economy is used to show that hysteresis can cause variation in the normal rate of capacity utilization within a subset of the range of observed variation in the actual capacity utilization rate. This suggests that the economy exhibits both constancy and (endogenous) variability in the normal rate of utilization over different ranges of variation in the actual rate. More broadly speaking, the genuine hysteresis model is shown to provide the basis for a synthesis of Post Keynesian macrodynamics that draws on both the Classical/neo-Keynesian and Kaleckian modeling traditions.

Highlights

Assumptions about the normal rate of capacity utilization are crucial in Post Keynesian macrodynamic models
Both our model and the interval models are consistent with a consensual vision of the possibility of discretely different macrodynamics operating over different ranges of variation in the actual rate of capacity utilization
That our analysis provides only partial support for this hypothesis: some sectors of the US economy do not display the statistical regularities consistent with the discrete switching between higher and lower values of the normal rate that can be associated with genuine hysteresis in the latter

Summary

Introduction

Assumptions about the normal rate of capacity utilization are crucial in Post Keynesian macrodynamic models. For Classical/neo-Keynesian economists (Serrano, 1995; Skott, 2010), the normal rate of capacity utilization is fixed and the actual rate adjusts towards the normal rate in the long run Kaleckian authors such as Lavoie (1996) and Dutt (1997) instead emphasize that the normal rate is a variable that adjusts to the actual rate of capacity utilization. Skott (2012) criticizes the Kaleckian approach on the grounds that it lacks: 1) proper behavioral foundations; 2) an explanation as to why the normal rate of capacity utilization should be treated as a conventional variable; and 3) justification for a process of adaptation in the normal rate that is both quantitatively fast and unbounded.1 Setterfield and Avritzer (2019) take up these points by suggesting a genuine hysteresis mechanism operating in the normal rate of capacity utilization. It is claimed that the genuine hysteresis model provides a basis for countering the third critique of Skott (2012)

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Discussion

Conclusion