NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Solving the DMP Model Accurately

Nicolas Petrosky-Nadeau, Lu Zhang

NBER Working Paper No. 19208
Issued in July 2013
NBER Program(s):   AP   CF   EFG   LS   ME

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.

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Document Object Identifier (DOI): 10.3386/w19208

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