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Business cycles, unemployment insurance and the calibration of matching models

  • James S. Costain
  • Michael Reiter

This paper theoretically and empirically documents a puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, either sticky wages or match-specific productivity shocks can improve the model's performance by making the firm's flow of surplus more procyclical, which makes hiring more procyclical too.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 872.

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Date of creation: Jun 2003
Date of revision: Oct 2006
Handle: RePEc:upf:upfgen:872
Contact details of provider: Web page: http://www.econ.upf.edu/

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