On the empirical content of the convergence debate: Cross-country evidence on growth and capacity utilisation

Abstract

The Neo-Kaleckian model predicts that actual capacity utilisation is endogenous to demand shocks and positively correlated with growth in the short and long run. Competing macroeconomic theories predict that such correlation does not exist in the long run and demand shocks have transitory effects on capacity utilisation. Using a quarterly unbalanced panel of 21 developed and developing countries, we show that taking into account direct survey measures, capacity utilisation is stationary, positively correlated with growth in the short run and uncorrelated with growth in the long run. These results are inconsistent with the long-run behaviour of the Neo-Kaleckian model.