How does active household demand alter the implications of the New-Keynesian model? Building on recent evidence of procyclical household shopping time, I develop a model with variable household shopping effort and imperfect goods market matching. In this framework, long-run GDP declines due to the interaction between search frictions and monopolistic competition. The Phillips curve flattens, while marginal cost and total hours exhibit lower volatility, and both capacity utilization and TFP become endogenous. These effects arise from a trade-off between search costs and goods prices, which remains imperfect due to price adjustment costs. The impact is stronger in demand-driven markets with stickier prices. Despite these modifications, the model retains the same three-equation reduced form as a standard New-Keynesian model. This paper provides a foundation for incorporating a wide range of goods market characteristics and simplifies it to a textbook New-Keynesian model with just one additional parameter in its most basic form.

 Working Paper       Slide Set 

Frictional goods markets play a crucial role in determining capacity utilization and total factor productivity (TFP). The trade-off between goods prices and household search effort is key to goods market matching, influencing TFP throughout the business cycle. This paper develops a New-Keynesian DSGE model with capital utilization and worker effort, expanding it to include goods market search-and-matching (SaM) to capture frictional markets. Using Bayesian estimation and capacity utilization survey data, I compare different capacity utilization channels. The results show that incorporating goods market SaM improves data fit, while capital utilization and worker effort channels are less influential than suggested in previous literature. TFP fluctuations rise for demand and goods market mismatch shocks, but decline for technology shocks, a pattern that strengthens with increasing goods market frictions and stickier prices. These findings highlight the importance of frictional goods markets in explaining the divergence between technology and TFP over the business cycle.

 IWH DP 9/2022       Slide Set       Poster 

The data indicates that goods market intermediation plays a crucial role in the allocation of goods, evidenced by the incomplete pass-through of marginal costs to consumer prices. This is reflected in the highly cyclical nature of the real PPI—the ratio of consumer prices to final demand producer prices. I develop a wholesaler-retailer-consumer framework that explains the joint behavior of real producer prices, consumer price inflation, and producer price inflation, while also aligning with macroeconomic aggregates. Neither sticky producer nor consumer prices alone can account for the data’s joint behavior. The model generates significant incomplete pass-through of marginal costs to prices, which intensifies over the business cycle. Frictions in retail and wholesale markets amplify one another, making the intermediation process reliant on their joint dynamics. Retailers balance frictions in both markets, absorbing shocks to optimize intertemporal intermediation. This process plays a significant role in the transmission of monetary policy.

The Danube Region faces the dual challenge of enhancing cohesion and competitiveness through deeper cooperation, with less developed economies needing to accelerate their catch-up to wealthier counterparts. High levels of capital formation are essential, requiring sustained investment ratios in countries with lower GDP per capita and improvements in the investment climate to attract both domestic and foreign direct investment (FDI). Maintaining international cost competitiveness necessitates aligning wage growth with labor productivity, particularly in countries with low technological capacity. Economic growth, alongside labor market and educational reforms, is crucial for job creation. Enhanced connectivity, accessibility, and resource efficiency can transform the region into a competitive economic zone, while reducing energy losses, diversifying energy sources, and increasing renewable energy use can lower import dependency. Despite improved access to finance since 2013, small and medium-sized enterprises (SMEs) still face financing challenges, underscoring the need for efficient resource allocation to boost investment and employment. Although cooperation across the Danube Region has intensified, significant potential within the EU Strategy for the Danube Region (EUSDR) remains untapped. Greater transparency, coordination, and inclusion of less developed regions and organizations, particularly in Southeast Europe, Moldova, and Ukraine, are vital to fostering equitable integration and maximizing regional synergies.

 Published Report