DP1221 Capital Utilization and Returns to Scale

Author(s): Craig Burnside, Martin Eichenbaum, Sérgio Rebelo
Publication Date: August 1995
Keyword(s): Capital Utilization, Returns to scale, Technology Shocks
JEL(s): E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1221

This paper studies the implications of procyclical capital utilization rates for inference regarding cyclical movements in labour 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 labour (SRIRL) 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.