Shopping Time and Frictional Goods Markets: Implications for the New-Keynesian Model

This paper extends the canonical New-Keynesian (NK) model by incorporating costly household search effort and imperfect matching in goods markets, motivated by the observed procyclical behavior of shopping time and capacity underutilization. This structure endogenizes both the price elasticity of demand and capacity utilization. In steady state, search-and-matching (SaM) frictions lower long-run and potential output by increasing markups and generating idle productive capacity. In the dynamic model, search prices act as an additional inflationary term in the Euler equation, reducing its slope by up to 91 %, while capacity-driven productivity effects steepen the Phillips curve by 15 %. The resulting five-equation NK-SaM system nests the standard NK model and features endogenous real rigidities and cost-push forces. Simulations show that monetary policy becomes less effective, TFP shocks generate more RBC-like dynamics, and inflation and output responses are amplified or dampened depending on the relative convexity of search and labor effort. While the model can match a countercyclical labor wedge under certain calibrations, this comes with a trade-off against fitting procyclical efficiency dynamics.