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The Shimer puzzle and the correct identification of productivity shocks

Barnichon, Regis (2007) The Shimer puzzle and the correct identification of productivity shocks. CEPDP, 823. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853280835

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Identification Number: 823

Abstract

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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2007 Regis Barnichon
Subjects: H Social Sciences > HD Industries. Land use. Labor
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Date Deposited: 18 Jul 2008 16:29
Last Modified: 01 Oct 2010 09:12
URI: http://eprints.lse.ac.uk/id/eprint/19691

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