Effective Demand, Exogenous Normal Utilization and Endogenous Capacity in the Long Run: Evidence from a Cointegrated Vector Autoregression Analysis for the USA

Using Cointegrated Vector Auto-Regression analysis, we provide evidence for the US manufacturing sector that production capacities adjust endogenously to current output in the long run. The rate of capacity utilization, i.e. the output–capacity ratio, is found to be stationary since production capacities respond endogenously to changes in current output and not vice versa. Hence, the principle of effective demand in a growth context, by which a permanent demand shock has a permanent growth effect, is consistent with the stylized fact of a stationary rate of capacity utilization since production capacities are endogenous in the long run.