Risk Matters: The Real Effects of Volatility Shocks / Jesús Fernández-Villaverde, Pablo A. Guerrón-Quintana, Juan Rubio-Ramírez, Martín Uribe.

Format:

Book

Author/Creator:

Fernández-Villaverde, Jesús.

Contributor:

National Bureau of Economic Research.

Guerrón-Quintana, Pablo A.

Rubio-Ramírez, Juan.

Uribe, Martín.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14875.

NBER working paper series no. w14875

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Risk Matters

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

April 2009.