“The Business Cycle Mechanics of Search and Matching Models“
with Joshua Bernstein and Alex Richter
FRB Dallas Working Paper 2026, August 2020
This paper provides new insights into the business cycle mechanics of search and matching models. We develop a novel identification scheme based on the matching elasticity that allows these models to perfectly match a range of labor market moments. Our estimated linear model also matches several non-targeted moments including the Beveridge curve and the decomposition of inflows and outflows of unemployment. A structural decomposition reveals job separation rate shocks explain 40% of unemployment volatility. The nonlinear version of our model generates state-dependent dynamics that produce empirically consistent fluctuations in output growth uncertainty, 37% of which stem from separation rate shocks.