DMP Flashcards
State the job finding and job separation rate
Finding = \lambda:u
Separation = \sigma
Law of motion of unemployment and derive the BC curve
See notability
If we have a shift in the BC, what can this be due to?
It can be that we have a new pool of unemployed.
What does it mean that we have free entry in the DMP model?
The vacancy market is competitive, i.e., the value of opening a vacancy must be 0 in eq.
Define the equlibrium in the DMP model
See notability.
What happens as Y increases in the model?
JC will shift more than WC thus we will have higher wages and higher theta thus also lower unemployment and more vacancies.
What is the Chetty rule of UI?
10 weeks extra of UI gives one week extra unemployment.
Is the DMP model efficient?
Clearly not (in the usual sense)
▶ An unconstrained social planner would ignore the search frictions and allocate all workers to a firm at all points in time
Random matching implies generically inefficient equilibria, opening the room for welfare-improving government interventions
What are the externalities from vacancy creation in the DMP model?
Why do these externalities arise?
▶ Positive thick market externality: workers will find jobs faster
▶ Negative congestion externality: other firms will find workers slower
▶ these externalities arise due to the matching function
When is the exception that the decentralized equlibrium acualy is efficient?
When \gamma = \epsilon_{m,u}(\theta)
Where m is the matching function.
This is the Hosios thing
What do we mean by efficiency in the DMP model?
“Would the creation of more vacancies increase welfare?
Do we have fast or slow convergence and the DMP model?
Very fast, we are half way to SS in just 1.1 month. This is true in both the model and data.
That is, given sufficiently high transition rates, the labor market converges to steady state very fast.
Can the DMP explain the unemployment volatility?
We check this my taking d\theta/dy y/theta.
The model comes no way near the data
Why does DMP fail in generating unemployment volatility?
The equilibrium response of wages via Nash bargaining inhibits firms’ incentive to create vacancies.
What is the Shimer puzzle in regard to the DMP model?
A reasonable calibration of the basic DMP model cannot explain observed unemployment volatility
▶ True both for productivity shocks and separation rate shocks
