Measuring Capacity Utilization in OECD Countries
A Cointegration Method
This paper derives measures of potential output and capacity utilization for a number of OECD countries, using a method based on the cointegration relation between output and the capital stock. The intuitive idea is that economic capacity (potential output) is the aspect of output that co-varies with the capital stock over the long run. We show that this notion can be derived from a simple model that allows for a changing capital-capacity ratio in response to partially exogenous, partially embodied, technical change. Our method provides a simple and general procedure for estimating capacity utilization. It also closely replicates a previously developed census-based measure of US manufacturing capacity-utilization. Of particular interest is that our measures of capacity utilization are very different from those based on aggregate production functions, such as the ones provided by the IMF.
Explorations in Theory and Empirical Analysis
The State of the US and World Economies