How well does the Mortensen-Pissarides model match the business cycle data?

From a few years back, Harold Cole and Richard Rogerson study this question and write:

We examine whether the Mortensen-Pissarides matching model can account for the business cycle facts on employment, job creation, and job destruction.  A novel feature of our analysis is its emphasis on the reduced-form implications of the matching model.  Our main finding is that the model can account for the business cycle facts, but only if the average duration of a nonemployment spell is relatively high — about nine months or longer.

I do not wish to claim that today's currently long unemployment spells make this the model to use.  I would point out, however, that most Keynesian models suggest more mean-reversion than we seem to be experiencing, especially since our central bank, whatever its weaknesses, is no longer allowing outright deflation.  The topic of "short run macroeconomics for the long run" will be a boom area, and right now it is poorly understood.


Comments for this post are closed