Productive demand, Sectoral Comovement, and Total Capacity Utilization

We develop a three-sector model in which goods market frictions impart a causal effect of demand shocks on measured productivity and estimate it using Bayesian techniques. Our identification makes novel use of total capacity utilization in nondurables and durables, which greatly improves the precision of estimated shopping-related parameters and implies a strong demand channel. Unanticipated and news shocks to shopping effort explain most of the forecast error variance decomposition of output, the Solow residual, and utilization. Capacity utilization explains over 80% of the Solow residual variance. Search demand shocks are essential for generating positive comovement of the utilization series and facilitate sectoral comovement more generally.