ENDOGENOUS CAPITAL UTILIZATION AND PRODUCTIVITY-MEASUREMENT IN DYNAMIC FACTOR DEMAND MODELS - THEORY AND AN APPLICATION TO THE US ELECTRICAL MACHINERY INDUSTRY

The literature on dynamic factor demand models has, until recently, la rgely overlooked the issue of capital utilization. In this paper we al low for variations in the rate of capital utilization within the conte xt of a dynamic factor demand model by adopting a modeling framework w ithin which the firm combines its beginning-of-period stocks with othe r inputs to produce its outputs as well as its end-of-period stocks. W e also define measures of productivity and capacity utilization for th e adopted framework. As a byproduct, the framework also provides for a consistent decomposition of gross investment into replacement and exp ansion investment. As an illustration, the model is applied to U.S. el ectrical machinery data.