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Is capacity utilization variable in the long run? An agent-based sectoral approach to modeling hysteresis in the normal rate of capacity utilization

Author

Listed:
  • Federico Bassi

    (Centre de recherche en économie de l’Université Paris Nord (CEPN))

  • Tom Bauermann

    (Ruhr-University Bochum)

  • Dany Lang

    (Université Sorbonne Paris Nord)

  • Mark Setterfield

    (New School for Social Research)

Abstract
Post 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.

Suggested Citation

  • Federico Bassi & Tom Bauermann & Dany Lang & Mark Setterfield, 2020. "Is capacity utilization variable in the long run? An agent-based sectoral approach to modeling hysteresis in the normal rate of capacity utilization," FMM Working Paper 56-2020, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:56-2020
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Normal rate of capacity utilization; Harrodian instability; genuine hysteresis; Kaleckian growth theory;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • L7 - Industrial Organization - - Industry Studies: Primary Products and Construction
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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