Endogenous Beveridge cycles and the volatility of unemployment

This paper aims to explain the magnitude and cyclical structure of the fluctuations in unemployment and vacancies. Adding demand externalities to an otherwise standard search and matching model reduces the need for exogenous shocks in explaining unemployment fluctuations. Under plausible parameter values, the equilibrium dynamics include a stable limit cycle that resembles the empirically observed counterclockwise cycles around the Beveridge curve. Quantitatively, these endogenous `Beveridge cycles' can explain half of the volatility and almost all persistence of unemployment without any exogenous forces, avoiding the amplification and propagation problems of the standard model.