New publication | Solving the Diamond–Mortensen–Pissarides model: A hybrid perturbation approach
Search-and-Matching models à la Diamond–Mortensen–Pissarides play an important role in business cycle research. Perturbation methods are commonly used to analyse these frameworks but often yield inaccurate solutions. Addressing this issue, this paper proposes a solution involving Hybrid Perturbation and a Change of Variable. It argues that this approach maintains simplicity while significantly improving accuracy. Through application to the Hagedorn and Manovskii (2008) model, the paper demonstrates the effectiveness of this method, achieving high accuracy and closely mirroring the business cycle dynamics generated by recent projection approaches.
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Abstract
Projection methods are deemed necessary to accurately solve various variants of the Diamond–Mortensen–Pissarides model used in business cycle research. This paper argues that hybrid perturbation, once combined with a non-linear change of variable, can provide an alternative, producing accurate solutions while retaining most of the simplicity of standard perturbation: Applying the method to the Hagedorn and Manovskii (2008) model, it delivers high accuracy and nearly identical business cycle moments as recent projection approaches.
