Matching Models Under Scrutiny : Understanding the Shimer Puzzle

Two papers have recently questioned the quantitative consistency of the search and matching models. Shimer (2005) has argued that a text-book matching model is unable to explain the cyclical variation of unemployment and vacancies in the U.S. economy. Costain and Reiter (2007) have found the existence of a trade-off in the model’s performance : any attempt to change the calibrated values in order to amend such business cycle inability would jeopardize the model’s predictions about the impact of unemployment benefits on the hazard rate. In surveying the literature originated in these findings, I distinguish three different avenues that have been followed to corret the model : change in wage formation, change in the calibration, changes in the model specification. The last approach seems to reach the best results both from a business cycle and from a microeconomic viewpoint.