Citation

Discussion Paper Details

Please find the details for DP7264 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Risk Matters: The Real Effects of Volatility Shocks

Author(s): Jesús Fernández-Villaverde, Pablo A. Guerron-Quintana, Juan Francisco Rubio-Ramírez and Martín Uribe

Publication Date: April 2009

Keyword(s): DSGE Models, Small Open Economy and Stochastic Volatility

Programme Area(s): International Macroeconomics

Abstract: This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7264

Bibliographic Reference

Fernández-Villaverde, J, Guerron-Quintana, P, Rubio-Ramírez, J and Uribe, M. 2009. 'Risk Matters: The Real Effects of Volatility Shocks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7264