Matching Models Under Scrutiny: An Appraisal of the Shimer Puzzle

Abstract

Two papers have recently questioned the quantitative consistency of the search and matching model. Shimer has argued that a textbook matching model is unable to explain the cyclical variation of unemployment and vacancies in the US economy. Costain and Reiter have found the existence of a trade-off in the model's performance: any attempt to change the calibrated values to improve the model's ability to predict the business cycle jeopardizes its predictions of the impact of unemployment benefits on unemployment. In surveying the literature originating in these findings, I distinguish three different avenues that have been followed to correct the model: change in wage formation, change in the calibration and changes in the model specification. The last approach seems to achieve the best results both from a business cycle and from a microeconomic viewpoint.

Interpreting the Beveridge curve. An agent-based approach

“…Other papers claim the standard setup does not capture some realistic features of moder labour market that would amplify the productivity shocks. See Cardullo (2010) for a detailed survey. 24 Hall (2017), for instance, focuses on the discount rate while Farmer (2012) looks at the stock market.…”

The Cyclical Volatility of Equilibrium Unemployment and Vacancies: Evidence From Italy

“…After the publication of two influential articles by Shimer (, ) — in which he shows that the standard Mortensen–Diamond–Pissarides (MDP) model is unable to replicate observed fluctuations in unemployment and job vacancies in response to productivity shocks of plausible magnitude — the empirical appraisal of the cyclical behaviour of equilibrium unemployment and vacancies has regained a lot of interest in the macroeconomic debate (e.g. Cardullo, ; Guerrazzi, ).…”

On Persistent Demand Shortages: A Behavioural Approach

“…In the search and matching literature, for instance, it has been identified as a possible resolution of the so-called Shimer puzzle (2005). See Cardullo (2010) for a survey. 3 As an alternative to the sticky-price approach, Mankiw and Reis (2002) propose a sticky-information model where information diffuses slowly through the population.…”

“…In the search and matching literature, for instance, it has been identified as a possible resolution of the so‐called Shimer puzzle (). See Cardullo () for a survey.…”