Working Paper: NBER ID: w19208
Authors: Nicolas Petrosky-Nadeau; Lu Zhang
Abstract: An accurate global algorithm is critical for quantifying the dynamics of the Diamond-Mortensen-Pissarides model. Loglinearization understates the mean and volatility of unemployment, overstates the unemployment-vacancy correlation, and ignores impulse responses that are an order of magnitude larger in recessions than in booms. Although improving on loglinearization, the second-order perturbation in logs also induces large errors. We demonstrate these insights in the context of Hagedorn and Manovskii (2008). Once solved accurately, their small surplus calibration fails to explain the Shimer (2005) puzzle. While the volatility of labor market tightness is close to the data, the unemployment volatility is too high.
Keywords: No keywords provided
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| loglinearization (C51) | unemployment volatility (J64) |
| projection algorithm (F17) | unemployment volatility (J64) |
| loglinearization (C51) | unemployment-vacancy correlation (J64) |
| projection algorithm (F17) | unemployment-vacancy correlation (J64) |
| unemployment dynamics (non-linear) (J64) | labor market predictions (J20) |