Normandin, Michel: Capacity Utilization and the Dynamics of Business Cycle Fluctuations
World Conference Econometric Society, 2000, Seattle

Martin Boileau, University of Colorado
Michel Normandin, Universite du Quebec a Montreal
Capacity Utilization and the Dynamics of Business Cycle Fluctuations
Session: C-10-26  Tuesday 15 August 2000  by Normandin, Michel
We perform an empirical evaluation of the role of capacity utilization in business cycle fluctuations. We first document the relation between capacity utilization and business cycle fluctuations in historical data and then verify whether these empirical features can be explained by a dynamic general equilibrium environment with variable rates of capacity utilization and realistic stochastic processes for the model's forcing variables. In this evaluation, we use two measures of the business cycle: output growth and the cyclical component of output. We find that, for both historical data and our theoretical economy, capacity utilization is procyclical, a coincident indicator of the cyclical component of output, but a lagging indicator of the growth rate of output. We also find that capacity utilization is much more correlated with the cyclical component of output than with output growth.

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