The Impact of Active Aggregate Demand on Utilization-Adjusted TFP
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.
A Three-Equation GM-SaM (Goods Market Search-and-Matching) Model
How does active aggregate demand of households change the implications of the New-Keynesian model? Building on recent evidence of procyclical household shopping time, I propose a model with variable household shopping effort and imperfect goods market matching. Long-run GDP decreases in a nexus of search frictions and monopolistic competition. The Phillips curve slope becomes flatter, marginal costs and total hours show lower standard deviations, and capacity utilization and TFP become endogenous. All results depend on a trade-off between search costs and goods prices, which is imperfect due to price adjustment costs. The results become more pronounced in demand-driven markets with stickier prices. At the same time, the model shows the same three-equation reduced form as a textbook New-Keynesian model. This paper builds the basis for introducing a large variety of goods market characteristics and breaks it down to a textbook New-Keynesian model with one additional parameter in its simplest form.