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Risk Matters: The Real Effects of Volatility Shocks

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  • Jesus Fernandez-Villaverde
  • Pablo Guerron-Quintana
  • Juan F. Rubio-Ramirez
  • Martin Uribe

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)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 6 (October)
Pages: 2530-61

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2530-61

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  1. Las raíces políticas de la crisis del Euro
    by Cives in Politikon on 2012-05-22 11:48:47
  2. El acuerdo del Eurogrupo: Vivir en la Incertidumbre
    by Luis Garicano in Nada Es Gratis on 2012-07-10 10:04:44
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