Solving the DMP Model Accurately

Forthcoming, Quantitative Economics

48 Pages Posted: 5 May 2017

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: October 2016

Abstract

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

Petrosky-Nadeau, Nicolas and Zhang, Lu, Solving the DMP Model Accurately (October 2016). Forthcoming, Quantitative Economics. Available at SSRN: https://ssrn.com/abstract=2867470

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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