Premium
Interest rate volatility and macroeconomic dynamics: Heterogeneity matters
Author(s) -
Curran Michael,
Velic Adnan
Publication year - 2020
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12477
Subject(s) - economics , volatility (finance) , stochastic volatility , econometrics , business cycle , emerging markets , markov chain , interest rate , volatility swap , sabr volatility model , debt , volatility smile , great moderation , implied volatility , monetary economics , macroeconomics , statistics , mathematics
We examine the relation between real interest rate volatility and aggregate fluctuations for a diverse sample of countries. Compiling a new dataset including emerging and advanced countries, the substantial variation in our data yields novel results: (a) stochastic volatility outperforms Markov‐switching in representing interest rates, (b) some advanced economies can be more volatile than emerging markets, and (c) creditors take on more debt following volatility shocks. We show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity produces significant parameter differences, playing an important role in distinguishing the effects of volatility shocks.