The multifractal character of capacity utilization over the business cycle: An application of Hurst signature analysis

Abstract

Abstract Capacity utilization rates and the index of industrial production are examined for multifractality over the 1972–2012 periods. Generally, all series behave very similarly, even though the index of industrial production is unambiguously non-stationary. Manufacturing sector capacity utilization exhibits less persistent long memory than overall capacity utilization, meaning that middle-stage activity is less directly affected by external driving forces, such as expansionary economic policy. Fractal persistence observed in the three series suggests aggregate production activity is driven largely by Cantillon effects of monetary expansion, but this effect predominates in early and late production stages, which are included in total capacity utilization but omitted from manufacturing utilization. Austrian business cycle theory predicts that monetary expansion has localized impacts in specific industrial sectors, resulting in higher capacity utilization in early and late stages of the Hayekian production structure, while simultaneously depressing utilization rates in middle-stage sectors. Hurst signature analysis of capacity utilization enables us to examine whether capacity utilization results from organic changes in supply and demand (anti-persistent long memory) or Cantillon effects of monetary expansion (persistent long memory).