Variable Factor Utilization and International Business Cycles

32 Pages Posted: 20 Jul 2001 Last revised: 8 Dec 2022

See all articles by Marianne Baxter

Marianne Baxter

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Dorsey Farr

Balentine & Company; University of Virginia - Department of Economics

Date Written: July 2001


When an economic boom produces high output, employment, and investment in the United States, there is usually a simultaneous boom in other industrialized countries. But, why? Answering this question is a central goal of international macroeconomics. However, multi-country dynamic equilibrium models have struggled with two major problems. The first difficulty is that the productivity shocks required by the model are implausibly large and volatile. Second, these models have difficulty explaining why factor inputs move together so closely across countries: realistic international comovement of business cycles requires implausibly high cross-country correlations of productivity shocks. This paper builds a model in which the utilization rates of capital and labor can be varied in response to shocks. We find that variable factor utilization is quite successful in (i) reducing the required size of productivity shocks; and (ii) increasing international comovement of factor inputs, with most of the improvement stemming from variable capital utilization.

Suggested Citation

Baxter, Marianne and Farr, Dorsey, Variable Factor Utilization and International Business Cycles (July 2001). NBER Working Paper No. w8392, Available at SSRN:

Marianne Baxter (Contact Author)

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Dorsey Farr

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