Procyclical Productivity in New Keynesian Models
We propose an easy-to-use search friction in the goods markets in medium-sized New Key-nesian models. This friction allows increases in measured productivity in response to increases in expenditures via higher search eﬀort from households. As a result markups can become procyclical and labor share countercyclical. Unlike in models that pose variable capital utilization and ﬁxed costs to generate procyclical productivity, ﬁrms do not have to spend more to achieve it. We estimate the model matching impulse responses with Bayesian techniques and show superior per-formance of models with search frictions relative to the state of the art alternative models in the literature. Our estimates also display low ﬁxed costs of production and lower Frisch elasticities.