Capital Utilization and Returns to Scale
Abstract
This paper studies the implications of procyclical capital utilization rates for inference
regarding cyclical movements in labor productivity and the degree of returns to scale.
We organize our investigation around five questions that we study using a measure
of capital services based on electricity consumption: (1) Is the phenomenon of near
or actual short-run increasing returns to labor an artifact of the failure to accurately
measure capital utilization rates? (2) Can we find a significant role for capital
services in aggregate and industry-level production technologies? (3) Is there evidence
against the hypothesis of constant returns to scale? (4) Can we reject the notion
that the residuals in our estimated production functions represent technology shocks?
(5) How does correcting for cyclical variations in capital services affect the statistical
properties of estimated aggregate technology shocks? The answer to the first two questions
is yes. The answer to the third and fourth questions is no. The answer to the fifth
question is "a lot."
Type
Journal articleCitation
Burnside, A. Craig, Eichenbaum, Martin and Rebelo, Sergio. Capital Utilization and
Returns to Scale. NBER Macroeconomics Annual. 10 (1995): 67-110. Print.
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A. Craig Burnside
Mary Grace Wilson Distinguished Professor
Burnside’s fields of specialization include macroeconomics and international finance.
His recent research focuses on foreign exchange markets, empirical methods in finance,
and the behavior of prices in housing markets. He has published articles in a number
of academic journals, including the American Economic Review, the Journal of Political
Economy, the Review of Economic Studies, and the Review of Financial Studies. He is
a Research Associate of the National Bure

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