Productive demand and sectoral capacity utilization

Abstract

The Solow residual, often used to measure technological progress, also reflects fluctuations in input utilization and related factors. We develop a multisector model decomposing capacity utilization into shopping-effort and variable capital intensity components, attributing sectoral Solow residual variation to utilization, technology, and input share mismeasurement. Using Bayesian estimation with capacity utilization data from nondurable and durable goods sectors, we identify key parameters governing goods market frictions. We find that search demand shocks explain most forecast error variance in the Solow residual, output, and utilization. Together with matching frictions, these shocks are essential for replicating observed sectoral dynamics, including volatility, correlations, and autocorrelations of utilization rates. Impulse response analysis reveals that demand shocks uniquely generate three-way comovement among utilization rates and the Solow residual.