The Shimer puzzle and the correct identification of productivity shocks
By: Régis Barnichon.
Contributors: London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 823
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2007
Place of publication: London
Language: eng
Format: Electronic resource
Description: Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks an ampiflication mechanism because it cannot generate 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 correct identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005a) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework with search unemployment, this paper estimates that close to 50% of the Shimer puzzle is due to the misidentification of productivity shocks. In addition, I show that extending the search model with an aggregate demand side remarkably improves the ability of the standard search model to match the moments of key labor market variables.
Notes: Title from publisher's abstract page (viewed on Jan. 3, 2008).

"August 2007."

Includes bibliographical references.

Also available in print.

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