Demand Shocks as Technology Shocks

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 TFP.We embed the productmarket 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.

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