Risk Matters: The Real Effects of Volatility Shocks

Jesus Fernandez-Villaverde, Pablo Guerron, Juan F Rubio-Ramirez and Martín Uribe ()

American Economic Review, 2011, vol. 101, issue 6, 2530-61

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)

Date: 2011
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Related works:
Working Paper: Risk Matters: The Real Effects of Volatility Shocks (2010)
Working Paper: Risk Matters: The Real Effects of Volatility Shocks (2009)
Working Paper: Risk Matters: The Real Effects of Volatility Shocks (2009)
Working Paper: Risk Matters: The Real Effects of Volatility Shocks (2009)
Working Paper: Risk Matters: The Real E¤ects of Volatility Shocks (2009)
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