Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data

Jesus Fernández-Villaverde (), Pablo Guerrón-Quintana () and Juan Rubio-Ramírez ()
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Jesus Fernández-Villaverde: Department of Economics, University of Pennsylvania
Pablo Guerrón-Quintana: Federal Reserve Bank of Philadelphia
Juan Rubio-Ramírez: Department of Economics, Duke University
Authors registered in the RePEc Author Service: Pablo A. Guerron, Juan F Rubio-Ramirez and Jesus Fernandez-Villaverde

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to us is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, we build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and we estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, we show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Our main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.

Keywords: DSGE models; Stochastic volatility; Parameter drifting; Bayesian methods (search for similar items in EconPapers)
JEL-codes: C11 E10 E30 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2010-04-15
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-ets, nep-mac and nep-ore
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Citations: View citations in EconPapers (24)

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Related works:
Working Paper: Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data (2010)
Working Paper: Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data (2010)
Working Paper: Fortune or Virtue: Time Variant Volatilities versus Parameter Drifting in U.S. Data (2010)
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