Is the Phillips curve dead? I propose a simple New-Keynesian framework with goods market search-and-matching to link inflation and monetary policy to the capacity utilization rate. This approach allows to include active aggregate demand and goods market characteristics. I can derive a ”Capacity Utilization New-Keynesian Phillips Curve” with a slope that depends on the level of goods market search-and-matching frictions. It decreases in markets where aggregate demand becomes more important for market matching. The model can replicate the joint behavior of capacity utilization and macroeconomic aggregates reasonably well. The goods market search-and-matching modeling approach allows to include a large variety of household and goods market matching characteristics like demographics, sentiment, or labor market status and breaks it down to one parameter.
Non-clearing goods markets are an important driver of capacity utilization and total factor productivity (TFP). The trade-off between goods prices and household search effort is central to goods market matching and therefore drives TFP over the business cycle. In this paper, I develop a New-Keynesian DSGE model with capital utilization, worker effort, and expand it with goods market search-and-matching (SaM) to model non-clearing goods markets. I conduct a horse-race between the different capacity utilization channels using Bayesian estimation and capacity utilization survey data. Models that include goods market SaM improve the data fit, while the capital utilization and worker effort channels are rendered less important compared to the literature. It follows that TFP fluctuations increase for demand and goods market mismatch shocks, while they decrease for technology shocks. This pattern increases as goods market frictions increase and as prices become stickier. The paper shows the importance of non-clearing goods markets in explaining the difference between technology and TFP over the business cycle.