The Unemployment Volatility Puzzle: a Note on the Role of Reference Points

This theoretical note aims at studying the role of reference points in generating unemployment volatility. For this purpose, I introduce the notion of reference points in a standard Mortensen-Pissarides model. I obtain two results. First, I find that the obtained model is similar to the one found by Pissarides (2009) with matching costs. Second, I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism à la Hagerdorn and Manovskii (2008).