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The Shimer Puzzle and the Correct Identification of Productivity Shocks

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Author Info
Régis Barnichon

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Abstract

Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks anampiflication mechanism because it cannot generate the observed business cycle fluctuationsin unemployment given labor productivity shocks of plausible magnitude. This paper arguesthat part of the problem lies with the correct identification of productivity shocks. Because ofthe endogeneity of measured labor productivity, filtering out the trend component as inShimer (2005a) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework with search unemployment, this paper estimates that close to 50% ofthe Shimer puzzle is due to the misidentification of productivity shocks. In addition, I showthat extending the search model with an aggregate demand side remarkably improves theability of the standard search model to match the moments of key labor market variables.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0823.

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Date of creation: Aug 2007
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Handle: RePEc:cep:cepdps:dp0823

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Related research
Keywords: unemployment fluctuations; labor productivity; search and matching model; New-Keynesian model;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dale T. Mortensen & Éva Nagypál, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Régis Barnichon, 2007. "Productivity, Aggregate Demand and Unemployment Fluctuations," CEP Discussion Papers dp0819, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  3. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November. [Downloadable!] (restricted)
    Other versions:
  4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
  5. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  7. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE. [Downloadable!]
  8. Robert Shimer, 2005. "The cyclicality of hires, separations, and job-to-job transitions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 493-508. [Downloadable!]
  9. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
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  10. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Federico Ravenna & Carl E. Walsh, 2009. "The welfare consequences of monetary policy," Working Paper Series 2009-12, Federal Reserve Bank of San Francisco. [Downloadable!]
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