Solving the Diamond-Mortensen-Pissarides model accurately

Abstract

An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond-Mortensen-Pissarides model. Log linearization understates the mean and volatility of unemployment, but overstates the volatility of labor market tightness and the magnitude of the unemployment-vacancy correlation. Log linearization also understates the impulse responses in unemployment in recessions, but overstates the responses in the market tightness in booms. Finally, the second-order perturbation in logs can induce severe Euler equation errors, which are often much larger than those from log linearization.

State Dependence in Labor Market Fluctuations

“…Our version of the DMP model hinges on heterogeneity in match-specific productivity, which allows for job-to-job transitions, building on the work of Fujita and Ramey (2012), who show that OJS is critical for the standard DMP model to deliver a realistic performance and generate the Beveridge Curve. Petrosky-Nadeau and Zhang (2017) show that a standard DMP model with exogenous job separation generates state dependence via the inherent nonlinearities of the policy function for market tightness. Although our version allows for this channel, we find it to be less quantitatively important, under our calibration, to explain the state dependence of labor market variables at business cycle frequency identified by the TVAR model.…”

Bargaining shocks and aggregate fluctuations

“…Petrosky-Nadeau and Zhang (2017) show how, in a partial equilibrium search-and-matching model with vacancy posting, we need a projection method to capture non-linearities adequately. Our recruiting technology avoids the occasionally binding constraint.…”

Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US

“… A related, albeit distinct, branch of the literature studies nonlinearities in the labour market. Petrosky‐Nadeau and Zhang () and Pizzinelli, Theodoridis and Zanetti () show nonlinearities in labour market variables across different phases of the business cycle. …”