Reallocation shocks, persistence and nominal rigidities

- Unemployment and vacancies are strongly negatively correlated in the data.
- The literature argues that reallocation shocks are not important because they generate a positive correlation.
- Reallocation shocks do not always generate a positive correlation between unemployment and vacancies.
- The sign of the correlation depends on the degree of price rigidity and on the persistence of the shock.
- A non-negligible role for reallocation shocks cannot be dismissed on theoretical grounds.

We reconsider the role of reallocation shocks in a simple New Keynesian model with search and matching frictions. The sign of the conditional correlation between unemployment and vacancies depends on the degree of price rigidity and on the persistence of the shock. Therefore, a non negligible role for reallocation shocks in driving business cycle fluctuations cannot be ruled out on theoretical grounds.