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American Economic Review: Vol. 101 No. 6 (October 2011)
AER Volume. 101, Issue 6 | 
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Risk Matters: The Real Effects of Volatility Shocks
Article 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.101.6.2530
DOI: 10.1257/aer.101.6.2530
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)
Article Full-Text Access
Full-text Article
Additional Materials
Download Data Set (77.40 KB) | Online Appendix (234.50 KB)
Authors
Fernández-Villaverde, Jesús (U PA)
Guerrón-Quintana, Pablo (Federal Reserve Bank of Philadelphia)
Rubio-Ramírez, Juan F. (Duke U and Federal Reserve Bank of Atlanta)
Uribe, Martin (Columbia U)
Guerrón-Quintana, Pablo (Federal Reserve Bank of Philadelphia)
Rubio-Ramírez, Juan F. (Duke U and Federal Reserve Bank of Atlanta)
Uribe, Martin (Columbia U)
JEL Classifications
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
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
