Capacity utilization in the USA and inflation: testing for cointegration and Granger causality

Abstract

This paper investigates the long-run and short-run dynamics between capacity utilization and inflation in the USA by using cointegration and error-correction models. It employs monthly data from January 1984 to December 1994. Although each variable in level is found non-stationary by unit root tests, ADF tests and error-correction models fail to confirm any long-run association between capacity utilization and inflation. Despite a lack of cointegration, error-correction models have been utilized to identify Granger causality that has been found to run from total industrial capacity utilization to inflation.