Risk Matters: The Real Effects of Volatility Shocks | Zendy

Jesús FernándezVillaverde | Zendy; Pablo Guerrón-Quintana | Zendy; Juan Francisco Rubio-Ramı́rez | Zendy; Martı́n Uribe | Zendy

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Risk Matters: The Real Effects of Volatility Shocks

Author(s) -

Jesús FernándezVillaverde,

Pablo Guerrón-Quintana,

Juan Francisco Rubio-Ramı́rez,

Martı́n Uribe

Publication year - 2011

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.101.6.2530

Subject(s) - economics , volatility (finance) , interest rate , business cycle , small open economy , monetary economics , stochastic volatility , real interest rate , emerging markets , econometrics , volatility swap , volatility smile , volatility risk premium , debt , implied volatility , macroeconomics , monetary policy

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)

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