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Analysis on the Relationship between Capacity Utilization and Inflation

Author: XiongSiMi
Tutor: WangWeiGuo
School: Dongbei University of Finance
Course: Quantitative Economics
Keywords: Capacity Utilization Inflation Peak to Peak Panel Data VAR Model
CLC: F425;F822.5
Type: Master's thesis
Year: 2011
Downloads: 97
Quote: 0
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Abstract

After the financial crisis,China has invested 0.4 billion for economic growth. Along with the growth, excess capacity also appears in many industries. Currently we have both excess capacity and high inflation brought by the large investment. The state council has been working on the guild lines and policies since early 2006. besides that, theoretical circles has also made a great contribution to help solving this problem. Since the existing studies mainly focus on the reason of excess capacity, this paper will analyze the impact of excess capacity to macro-economy.To help further analysis, this paper selects the annual data of 26 manufacturing industries and computes both the capacity utilization rate and inflation rate. Based on that, the paper uses panel data model along with VAR model to study the relationship between capacity utilization and inflation. The method used here are unit root test. Granger causality test and impulse response function.The paper is divided into four parts. First part is introduction, which describes the background and goes through existing studies. Second part introduces the theoretical foundation of this paper. From the third part it comes to the empirical analysis, which is divided into index calculation and model establishment. In this part first the paper introduces the main measurement, the Peak to Peak method, along with the introduction to other measurements. Then it goes to regression model, using both panel data and VAR model to analyze the dynamic and static relationship between capacity utilization and inflation. The last part is the conclusion, along with the suggestions.The result shows that the improvement of manufacturing capacity utilization will cause corresponding inflation rate to increase, and capacity utilization rate is an effective indicator of inflation. In the long term, capacity utilization will Granger cause inflation to change, and inflation will response to the impulse from capacity utilization. Based on above empirical results, we suggest government to establish specific monitoring and warning mechanism. In the meanwhile, currently we can’t measure excess capacity only by the existing capacity utilization indicator, so we also need to build other indicators. We also find that current positive financial policy has sparked excess capacity, along with the high inflation brought about by huge amount of investment. In order to solve the problem, government must adjust the fiscal policy, and also change the local government’s role in economic development.Since current studies mainly focuses on the causality analysis of excess capacity, this paper attempts to examine the impact of capacity utilization to macro-economy. The writer uses Peak to Peak method to calculate capacity utilization, and selects inflation as the economic indicators. Utilized panel data and VAR model, the author examines the dynamic and static relationship between capacity utilization and inflation. However, the capacity utilization calculated in this paper may not be sufficient to reflect all the information. And at the same time this paper only selects the inflation as the indicator of macro-economy. In further research, it’s encouraged to involve more indicators into the study.

Analysis on the Relationship between Capacity Utilization and Inflation

Abstract

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