European Unemployment and Turbulence Revisited in a Matching Model

We recalibrate den Haan, Haefke, and Ramey’s matching model to capture our preferred specification of ‘turbulence’, modelled in terms of the transition dynamics of human capital after voluntary and involuntary job losses. Under our calibration, an increase in turbulence increases the unemployment rate and the duration of unemployment while leaving the inflow rate into unemployment roughly unchanged, mirroring features of European data in the 1980s and 1990s. ∗ Ljungqvist: Stockholm School of Economics (email: [email protected]); Sargent: New York University and Hoover Institution (email: [email protected]). We are thankful to Wouter den Haan, Christian Haefke and Garey Ramey for generously sharing their computer code, and to Stijn Van Nieuwerburgh and Pierre-Olivier Weill for excellent research assistance. Ljungqvist’s research was supported by a grant from the Bank of Sweden Tercentenary Foundation. Sargent’s research was supported by a grant to the National Bureau of Economic Research from the National Science Foundation.