Long-Run Variation in Capacity Utilization

February 4, 2017

We develop a generic Kalecki-Robinson model of growth that illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run.

Assuming that the normal rate of capacity utilization is exogenously fixed, it is then shown that variation in the actual capacity utilization rate can nevertheless occur – at least within limits – without triggering “Harrodian instability”. This result emanates from a discontinuity in the investment function that is grounded in Harrod’s own macrodynamics, so that it is ultimately the combination of Harrodian and Kaleckian dynamics that gives rise to long-run variations in the actual rate of capacity utilization in the presence of a fixed normal rate. Aggregate and industry-level US capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering Harrodian instability. A key finding is that the conditions necessary for the latter appear to be relatively rare.

Author: Mark Setterfield
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