Mortensen Pissarides model on Excel

The Mortensen-Pissarides Model on Excel

solving the Mortensen Pissarides model on Excel

You are asked to simulate dynamic equilibria of the Mortensen-Pissarides on
Excel. While we focus almost exclusively on steady-state equilibria in class, dynamic equilibria are simple to characterize. In any equilibrium, market tightness
adjusts instantly to its new steady-state value:
θt = θ∗ = A(ysk − w)2 : (1)
Part I: Due at week 6 discussion section
We want to describe an economy transitioning from an initial steady state to a
new steady state following a shock. In order to generate this transitional path,
do the following:
1. Enter the exogenous variables corresponding to the initial steady state:
A0, y0, w0, s0, and k0. (Assign one cell to each of these parameters in
your Excel file.) Compute the initial steady-state equilibrium as:
θ0 = A0(ys00k−0 w0)2 ;
u0 =
s0
s0 + Apθ0 :
2. Take u0 as the initial condition for ut. Enter the new exogenous variables
following a shock: A1, y1, w1, s1, and k1 (assign separate cells for parameter values following a shock). Compute the new market tightness, θ1, from
(1). The law of motion for ut given u0 and the new exogenous variables
is described by
∆ut+1 ≡ ut+1 − ut = s1(1 − ut) − utA1pθ1: (2)
Generate the sequence for ut and plot it.
1Part II: Due at week 7 discussion section
1. In order to choose realistic parameter values for the model, suppose the
period of time is a month. The separation rate is 4%, s = 0:04. Normalize
labor productivity to 1, y = 1. Suppose the wage corresponds to 80% of
productivity, w = 0:8. We set the entry cost to k = 3. What is the value
of A that would generate an unemployment rate of 5%? Take this list of
parameter values as your initial steady state.
2. By how much would y have to fall to raise steady-state unemployment
rate to 10%? Plot the transition.
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