Risk Matters: The Real Effects of Volatility Shocks
Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Juan F. Rubio-Ramírez, Martin Uribe
American Economic Review · 2011 · Volume 101 · Issue 6
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)
Keywords
General Aggregative Models: Neoclassical, Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data), Business Fluctuations, Cycles, Interest Rates: Determination, Term Structure, and Effects, Current Account Adjustment, Short-term Capital Movements, Economic Growth of Open Economies, Macroeconomic Analyses of Economic Development
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