Demand Shocks as Productivity Shocks ∗

@inproceedings{Bai2011DemandSA,
  title={Demand Shocks as Productivity Shocks ∗},
  author={Yan Bai and Kjetil Storesletten},
  year={2011}
}
We provide a macroeconomic model where demand for goods has a productive role. A search friction prevents perfect matching between potential customers and producers, and larger demand – in the sense of more search – increases output in the economy. Consequently, when viewed through the lens of a standard neoclassical aggregate production function, an increase in demand will appear as an increase in the Solow residual. We estimate the model using standard Bayesian techniques, allowing for… CONTINUE READING
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