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Interest rate volatility and macroeconomic dynamics: Heterogeneity matters

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  • Michael Curran
  • Adnan Velic

Abstract

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.

Suggested Citation

  • Michael Curran & Adnan Velic, 2020. "Interest rate volatility and macroeconomic dynamics: Heterogeneity matters," Review of International Economics, Wiley Blackwell, vol. 28(4), pages 957-975, September.
    • Handle: RePEc:bla:reviec:v:28:y:2020:i:4:p:957-975
    DOI: 10.1111/roie.12477
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