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American Economic Review Vol. 101 No. 6 2011

Risk Matters: The Real Effects of Volatility Shocks

Jesús Fernández-Villaverde1; Pablo Guerrón-Quintana2; Juan F. Rubio-Ramírez3; Martín Uribe4

1 University of Pennsylvania, 160 McNeil, 3718 Locust Walk, Philadelphia, PA 19004. · 2 Federal Reserve Bank of Philadelphia, 10 Independence Mall, Philadelphia, PA 19106-1574. · 3 Duke University, 213 Social Sciences, Duke University, Durham, NC 27708, and Federal Reserve Bank of Atlanta. · 4 Columbia University, 1109A International Affairs Building, New York, NY 10027.

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.

DOI
10.1257/aer.101.6.2530
Volume
101
Issue
6
Pages
2530-2561
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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