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The Shimer puzzle and the identification of productivity shocks

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  • Regis Barnichon

Abstract

Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks an amplification mechanism because it generates less than 10 percent of the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework to control for the endogeneity of productivity, this paper estimates that the MP model can account for a third, and possibly as much as 60 percent, of fluctuations in labor market variables.

Suggested Citation

  • Regis Barnichon, 2009. "The Shimer puzzle and the identification of productivity shocks," Finance and Economics Discussion Series 2009-04, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2009-04
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    References listed on IDEAS

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    5. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
    6. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    7. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-1674, September.
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    Cited by:

    1. Chugh, Sanjay K., 2013. "Costly external finance and labor market dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2882-2912.

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    Keywords

    Labor market ; Unemployment ; Labor productivity;

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