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Excess capacity and hysteresis in EU Countries. A structural approach

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  • Bassi, Federico

Abstract

We develop a structural method to estimate the rate of capacity utilization in 12 EU countries that consists of identifying the structural parameters of a Leontief production function, using a parsimonious theoretical specification. Parameters are correctly identified, stable and robust to alternative specifications. Our results provide evidence of persistent excess capacity and hysteresis in the rate of capacity utilization in many EU countries, especially after the 2008′s global financial crisis, thereby supporting the claim that larger fiscal deficits would have contributed to absorb excess capacity without producing persistent inflationary pressures or debt unsustainability. Despite the simplicity of our model, the method allows more complex macroeconomic specifications for country-specific applications.

Suggested Citation

  • Bassi, Federico, 2024. "Excess capacity and hysteresis in EU Countries. A structural approach," Structural Change and Economic Dynamics, Elsevier, vol. 71(C), pages 116-134.
    • Handle: RePEc:eee:streco:v:71:y:2024:i:c:p:116-134
    DOI: 10.1016/j.strueco.2024.07.002
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    More about this item

    Keywords

    Excess capacity; Hysteresis; Potential output; Output gap;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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