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Federal Reserve Bank of Richmond
Economic Quarterly
How Large Are Returns to Scale in the U.S.? A View Across the Boundary
Thomas A. Lubik
Abstract

I study the degree of returns to scale in aggregate U.S. data by estimating the standard RBC model with and without variable capacity utilization using Bayesian methods. The source of increasing returns is the presence of an externality in production. I find that, at best, returns are mildly increasing at a level statistically indistinguishable from the constant-returns case. A high enough degree of increasing returns is needed to support equilibrium indeterminacy and sunspot-driven business cycle fluctuations. In my estimation results, I find that I can conclusively rule out this possibility on account of a low estimated degree of increasing returns and a fairly inelastic labor supply.


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Thomas A. Lubik, "How Large Are Returns to Scale in the U.S.? A View Across the Boundary" , Federal Reserve Bank of Richmond, Economic Quarterly, issue 1Q, pages 79-103, 2016.
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Keywords: RBC model; business cycles
DOI: 10.21144/eq1020103
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