Risk Matters: The Real Effects of Volatility Shocks
American Economic Review
vol. 101,
no. 6, October 2011
(pp. 2530-61)
Abstract
We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, 011)Citation
Fernández-Villaverde, Jesús, Pablo Guerrón-Quintana, Juan F. Rubio-Ramírez, and Martin Uribe. 2011. "Risk Matters: The Real Effects of Volatility Shocks." American Economic Review, 101 (6): 2530-61. DOI: 10.1257/aer.101.6.2530Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E20 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- F32 Current Account Adjustment; Short-term Capital Movements
- F43 Economic Growth of Open Economies
- O11 Macroeconomic Analyses of Economic Development