Capital Utilization and Returns to Scale

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1995

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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."

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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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Burnside

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 Bureau of Economic Research, and was previously a member of the Board of Editors of the American Economic Review (2001-06, 2011-20), Associate Editor for the Review of Economics and Statistics (2012-15), co-editor of the Canadian Journal of Economics (2007-10), and Associate Editor for the Journal of Money Credit and Banking (2003-11).


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