Open AccessSolving the Diamond–Mortensen–Pissarides model accurately
Author(s) -
PetroskyNadeau Nicolas,
Zhang Lu
Publication year - 2017
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe452
Subject(s) - boom , linearization , volatility (finance) , perturbation (astronomy) , sublinear function , unemployment , econometrics , mathematics , economics , recession , mathematical analysis , keynesian economics , nonlinear system , physics , geology , oceanography , quantum mechanics , economic growth
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.