Business cycles, unemployment insurance, and the calibration of matching models

James S. Costain, Michael Reiter

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1120-1155
Number of pages36
JournalJournal of Economic Dynamics and Control
Volume32
Issue number4
DOIs
StatePublished - Apr 2008

Keywords

  • Matching function
  • Real business cycles
  • Unemployment insurance

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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