American Economic Review: Vol. 101 No. 6 (October 2011)


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Risk Matters: The Real Effects of Volatility Shocks

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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


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)

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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)

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

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