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Productive demand and sectoral capacity utilization

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  • Silva, Mario Rafael
  • Urias, Marshall

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.

Suggested Citation

  • Silva, Mario Rafael & Urias, Marshall, 2025. "Productive demand and sectoral capacity utilization," Economic Modelling, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:ecmode:v:153:y:2025:i:c:s0264999325003128
    DOI: 10.1016/j.econmod.2025.107317
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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