Revisiting TFP Fluctuations: The Role of Goods-Market Search and Time Allocation

Measured productivity fluctuates far more over the business cycle than technology. This paper shows that these movements mainly reflect coordination failures in the goods market. I develop a New Keynesian DSGE model, inspired by Barro's (2025) critique of frictionless goods markets, in which households allocate time between work and search, firms supply unmatched capacity, and trades form through goods-market search and matching. Matching efficiency determines capacity utilization and thus measured TFP. Bayesian estimation on U.S. and Euro Area data-using surveybased capacity utilization-shows that incorporating goods-market frictions sharply improves model fit and reduces the need for cost-push shocks. The interaction of sticky posted prices and flexible search prices generates a state-dependent demand elasticity, while the coordination channel links search effort to effective output: excess demand raises TFP by increasing match rates, excess supply lowers it by leaving capacity idle. The model identifies Barro-Grossman (1971) regimes in the data: the missing deflation after 2008 reflects a low-efficiency, classical-unemployment regime, whereas the post-COVID inflation surge arises from a high-tightness, repressed-inflation regime. Thus, short-run productivity is coordination-driven, and policy operates in a state-dependent environment where stabilizing market efficiency is as important as managing demand.