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UNEMPLOYMENT BENEFITS AND MATCHING EFFICIENCY IN AN ESTIMATED DSGE MODEL WITH LABOR MARKET SEARCH FRICTIONS

  • Ji Zhang (a1)
Abstract

To explain the high and persistent unemployment rate in the United States during and after the Great Recession, this effort develops and estimates a dynamic stochastic general equilibrium model with search and matching frictions and shocks to unemployment benefits and matching efficiency. It finds that unemployment benefits play an important role in the cyclical movement of unemployment through their effects on labor demand, a channel overlooked in previous studies. From the second half of 2008 to 2011, extended unemployment benefits may have increased the overall unemployment rate by one percentage point. In contrast, matching efficiency changes had less effect on the cyclical movement of unemployment for the same period, but significantly slowed down the recovery after 2012.

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Corresponding author
Address correspondence to: Ji Zhang, PBC School of Finance, Tsinghua University, 43 Chengfu Road, Haidian District, Beijing, China; e-mail: zhangji@pbcsf.tsinghua.edu.cn.
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I would like to thank my advisor, James D. Hamilton, for his invaluable advice. I would also like to thank Davide Debortoli, Shigeru Fujita, Garey Ramey, Irina A. Telyukova, and seminar participants at 2014 Midwest Macro and 2015 SNDE for their comments and suggestions. I am also grateful to Francesco Furlanetto and Nicolas Groshenny for generously sharing their data.

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References
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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