Solving the DMP Model Accurately
Forthcoming, Quantitative Economics
48 Pages Posted: 5 May 2017
Date Written: October 2016
An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond-Mortensen-Pissarides (DMP) model. Loglinearization understates the mean and volatility of unemployment, but overstates the volatility of labor market tightness and the magnitude of the unemployment-vacancy correlation. Loglinearization 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 loglinearization.
Keywords: Search Frictions, Unemployment, Projection, Perturbation, Nonlinear Dynamics, Parameterized Expectations, Finite Elements
JEL Classification: E24, E32, J63, J64
Suggested Citation: Suggested Citation