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Demand Shocks as Technology Shocks

Yan Bai¹; José-Víctor Ríos-Rull²; Kjetil Storesletten³

¹ University of Rochester · ² University of Pennsylvania · ³ University of Minnesota

Abstract We provide a macroeconomic theory where demand for goods has a productive role. A search friction prevents perfect matching between producers and potential customers. Larger demand induces more search, which, in turn, increases GDP and measured total factor productivity (TFP). We embed the product-market friction in a standard neoclassical model and estimate it using Bayesian techniques. Business cycles are driven by preference shocks, true technology shocks, and investment-specific shocks. Preference shocks have qualitatively similar effects as true productivity shocks. These shocks account for a large share of the fluctuations in consumption, GDP, and measured TFP and can be identified using shopping time data.

DOI

10.1093/restud/rdaf045

Volume

93 (2)

Pages

798-832

Language

en

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BibTeX

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