Further Evidence on the Dynamic Link Between Capacity Utilization and Inflation

Abstract

We reexamine the dynamic link between capacity utilization and inflation, allowing for the relationship to be asymmetric. We conduct a time series analysis of aggregate monthly U.S. data over an extended period of time (January 1967 to November 2008) as well as over several subsample periods corresponding to known changes in supply chain eras. The results indicate that significant asymmetry exists over different sample periods, but the specific relationship between inflation and capacity utilization has dwindled in the more recent information engineering era. In particular, the results are consistent with more efficient supply chains.

Notes

See Wu et al. (2005) for a thorough review of the literature on capacity planning and management in high-tech industries.

Subject to a few minor restrictions (see McElhattan 1978).

This is sometimes referred to as its natural rate.

Sichel (1993) described this type of asymmetry as capturing “sharp” movements where the autoregressive decay depends on whether the series is increasing or decreasing as oppose to being above or below some trend or threshold (known as “deep” movements).

Due to data restrictions, we do not consider the industrial revolution era identified by Siems (2005b).