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Switching Volatility in a Nonlinear Open Economy

Jonathan Benchimol () and Sergey Ivashchenko

No 60, Dynare Working Papers from CEPREMAP

Abstract: Uncertainty about a regime’s economy can change drastically around a crisis. An imported crisis such as the global financial crisis in the Euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the Euro area and United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with in calm periods. We describe how US shocks from both the real economy and financial markets affected the Euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers.

Keywords: DSGE; Volatility Shocks; Markov Switching; Open Economy; Financial Crisis; Nonlinearities (search for similar items in EconPapers)
JEL-codes: C61 E32 F21 F41 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2020-04
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
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