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Stochastic Volatility and DSGE Models

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  • Martin M. Andreasen

    ()
    (Bank of England and CREATES)

Abstract

This paper argues that a specification of stochastic volatility commonly used to analyze the Great Moderation in DSGE models may not be appropriate, because the level of a process with this specification does not have conditional or unconditional moments. This is unfortunate because agents may as a result expect productivity and hence consumption to be inifinite in all future periods. This observation is followed by three ways to overcome the problem.

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File URL: ftp://ftp.econ.au.dk/creates/rp/09/rp09_29.pdf
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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-29.

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Length: 8
Date of creation: 07 Jul 2009
Date of revision:
Handle: RePEc:aah:create:2009-29

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Great Moderation; Productivity shocks; and Time-varying coe¢ cients;

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  1. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  2. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," NBER Technical Working Papers 0321, National Bureau of Economic Research, Inc.
  3. Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
  4. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
  5. Siem Jan Koopman & Eugenie Hol Uspensky, 2002. "The stochastic volatility in mean model: empirical evidence from international stock markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(6), pages 667-689.
  6. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  7. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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Cited by:
  1. Rhys Bidder & Matthew E. Smith, 2013. "Doubts and variability: a robust perspective on exotic consumption series," Working Paper Series 2013-28, Federal Reserve Bank of San Francisco.

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