Skip to Main Content

A Theory of the Capacity Utilization/Inflation Relationship

By Mary G. Finn
Economic Quarterly
Summer 1996

A neoclassical theory presented here explains the relationship between capacity utilization and inflation. The theory shows how technology shocks, when accommodated by money growth, are an important source of positive comovement between inflation and utilization. By contrast, energy price shocks and exogenous changes in money growth cause opposite movements in inflation and utilization. The theory is successful in capturing the average correlation between utilization and inflation manifested in the U.S. data.

Subscribe to Economic Quarterly

Receive an email notification when Economic Quarterly is posted online:

Subscribe to Economic Quarterly

By submitting this form you agree to the Bank's Terms & Conditions and Privacy Notice.

Contact Icon Contact Us