Solving the DMP Model Accurately

43 Pages Posted: 27 Jun 2013 Last revised: 8 Jan 2014

See all articles by Nicolas Petrosky-Nadeau

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2013

Abstract

An accurate global algorithm is crucial 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 approximation errors. We demonstrate these insights within the context of Hagedorn and Manovskii (2008). Our quantitative results highlight the extreme importance of accurately accounting for nonlinear dynamics in quantitative macroeconomic studies.

Keywords: Search and matching frictions, the unemployment volatility puzzle, global approximation methods, projection, loglinearization, nonlinear impulse response functions

JEL Classification: E24, E32, J63, J64

Suggested Citation

Petrosky-Nadeau, Nicolas and Zhang, Lu, Solving the DMP Model Accurately (December 2013). Available at SSRN: https://ssrn.com/abstract=2285711 or http://dx.doi.org/10.2139/ssrn.2285711

Nicolas Petrosky-Nadeau (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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