The U.S. Capacity Utilization Rate: A New Estimation Approach

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The recent strengh of the U.S. economy and historically low rates of inflation have sparked considerable debate among economists and Federal Reserve officials. In order to better explain the recent behaviour of inflation, some observers have raised the concept of a non-accelerating inflation capacity utilization rate (NAICU). In this study, the author presents a new methodology to estimate the NAICU. A simple structural vector autoregression, including industrial production, the inflation rate, and the long-run real interest rate, is used to identify production capacity. Results show that production capacity is consistent with stable trend inflation. Using simple Phillips curves, out-of-sample forecast exercises show that the capacity utilization rate generated by the methodology presented in this paper seems to outperform the one now published by the Fed.

JEL Code(s): E, E3, E32, E37