Matching Models Under Scrutiny: An Appraisal of the Shimer Puzzle: Matching Models Under Scrutiny

Two papers have recently questioned the quantitative consistency of the search and matching model. Shimer has argued that a textbook matching model is unable to explain the cyclical variation of unemployment and vacancies in the US economy. Costain and Reiter have found the existence of a trade-off in the model's performance: any attempt to change the calibrated values to improve the model's ability to predict the business cycle jeopardizes its predictions of the impact of unemployment benefits on unemployment. In surveying the literature originating in these findings, I distinguish three different avenues that have been followed to correct the model: change in wage formation, change in the calibration and changes in the model specification. The last approach seems to achieve the best results both from a business cycle and from a microeconomic viewpoint.