Solving the Diamond-Mortensen-Pissarides model accurately Article Swipe
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Nicolas Petrosky-Nadeau
,
Lu Zhang
·
YOU?
·
· 2017
· Open Access
·
· DOI: https://doi.org/10.3982/qe452
· OA: W2741702477
YOU?
·
· 2017
· Open Access
·
· DOI: https://doi.org/10.3982/qe452
· OA: W2741702477
An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond-Mortensen-Pissarides model. Log linearization under- states 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.
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