Evaluating the empirical performance of DSGE models: What is the role of search and matching frictions in the labor and capital markets?

• Main Author: MOK, Weng Sam
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: labor market; search; Behavioral Economics; Economics; Work, Economy and Organizations
• Online Access: https://ink.library.smu.edu.sg/etd_coll_all/40; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1044&context=etd_coll_all
• Institution: Singapore Management University

A major perspective in explaining involuntary unemployment is to recognize the existence of job market frictions, in particular, job market matching frictions. The workhorse model employed is the Diamond- Mortensen-Pissarides (DMP) model. Similar to the labor market, the market for physical capital markets exhibits the same characteristics with a pool of unsold inventory as well as used capital that is sold and reallocated to other terms. Nevertheless, past research has highlighted several issues of the DMP model in matching the characteristics of the labor market. In a model enriched with labor participation flows and job separation, I evaluate the model performance in resolving the issues in the Krause and Lubik (2007) model in the presence of nominal price rigidity. The model resolves the failure in generating the Beveridge curve in the presence of endogenous job destruction. Separately, in a RBC model with frictional labor and physical capital market and endogenous labor participation, I evaluate the model prediction in a context where labor disutility is procyclical under both contemporaneous shocks and news shocks.