Demand Shocks as Productivity Shocks

Abstract

We build a model where demand shocks look like productivity shocks despite technology being constant. Frictions in goods markets allow shoppers (computers and investors) to play a central role in expanding output via a competitive search mechanism. We estimate the required demand shocks that generate real business cycles like those in the data. Our successfully replicates the business cycle properties in the data and poses new restrictions in the type of shocks that may hit consumption and investment demand.