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Macroeconomics and Volatility: Data, Models, and Estimation

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  • Jesús Fernández-Villaverde
  • Juan Rubio-Ramírez

Abstract

One basic feature of aggregate data is the presence of time-varying variance in real and nominal variables. Periods of high volatility are followed by periods of low volatility. For instance, the turbulent 1970s were followed by the much more tranquil times of the great moderation from 1984 to 2007. Modeling these movements in volatility is important to understand the source of aggregate fluctuations, the evolution of the economy, and for policy analysis. In this chapter, we first review the different mechanisms proposed in the literature to generate changes in volatility similar to the ones observed in the data. Second, we document the quantitative importance of time-varying volatility in aggregate time series. Third, we present a prototype business cycle model with time-varying volatility and explain how it can be computed and how it can be taken to the data using likelihood-based methods and non-linear filtering theory. Fourth, we present two "real life" applications. We conclude by summarizing what we know and what we do not know about volatility in macroeconomics and by pointing out some directions for future research.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16618.

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Date of creation: Dec 2010
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Publication status: published as (2013) \Macroeconomics and Volatility: Data, Models, and Methods." Joint with Juan F. Rubio-Ramrez (Duke University). In Advances in Economics and Econo- metrics: Theory and Applications, Tenth World Congress of the Econometric So- ciety , Cambridge University Press.
Handle: RePEc:nbr:nberwo:16618

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  1. Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Juan Rubio-Ramírez & Martín Uribe, 2009. "Risk Matters: The Real Effects of Volatility Shocks," NBER Working Papers 14875, National Bureau of Economic Research, Inc.
  2. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2010. "Risk, Uncertainty and Monetary Policy," CEPR Discussion Papers 8154, C.E.P.R. Discussion Papers.
  3. Ruediger Bachmann & Steffen Elstner & Eric R. Sims, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," NBER Working Papers 16143, National Bureau of Economic Research, Inc.
  4. Manuel S. Santos & Adrian Peralta-Alva, 2005. "Accuracy of Simulations for Stochastic Dynamic Models," Econometrica, Econometric Society, vol. 73(6), pages 1939-1976, November.
  5. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November.
  6. Jesus Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez., 2010. "Reading the recent monetary history of the U.S., 1959-2007," Working Papers 10-15, Federal Reserve Bank of Philadelphia.
  7. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2010. "Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data," NBER Working Papers 15928, National Bureau of Economic Research, Inc.
  8. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2004. "Estimating Dynamic Equilibrium Economies: Linear versus Nonlinear Likelihood," PIER Working Paper Archive 04-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
  10. Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-28, October.
  11. Fernández-Villaverde, Jesús & Rubio-Ramirez, Juan Francisco, 2006. "Estimating Macroeconomic Models: A Likelihood Approach," CEPR Discussion Papers 5513, C.E.P.R. Discussion Papers.
  12. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  13. Jesus Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2010. "Fortune or virtue: time-variant volatilities versus parameter drifting," Working Papers 10-14, Federal Reserve Bank of Philadelphia.
  14. Kevin B. Grier & Mark J. Perry, 2000. "The effects of real and nominal uncertainty on inflation and output growth: some garch-m evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 45-58.
  15. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
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Citations

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Cited by:
  1. Fabrice Collard & Sujoy Mukerji & Kevin Sheppard & Jean-Marc Tallon, 2011. "Ambiguity and the historical equity premium," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00594096, HAL.
  2. Dennis, Wesselbaum, 2012. "Stochastic Volatility in the U.S. Labor Market," MPRA Paper 43054, University Library of Munich, Germany.
  3. Steffen Henzel & Malte Rengel, 2013. "Dimensions of macroeconomic uncertainty: A common factor analysis," Ifo Working Paper Series Ifo Working Paper No. 167, Ifo Institute for Economic Research at the University of Munich.
  4. Marina Azzimonti, 2013. "The political polarization index," Working Papers 13-41, Federal Reserve Bank of Philadelphia.
  5. Dario Caldara & Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Yao Wen, 2012. "Computing DSGE models with recursive preferences and stochastic volatility," Finance and Economics Discussion Series 2012-04, Board of Governors of the Federal Reserve System (U.S.).
  6. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
  7. Martín Uribe, 2011. "Comment on "Risk, Monetary Policy and the Exchange Rate"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 315-324 National Bureau of Economic Research, Inc.
  8. Marina Azzimonti, 2013. "Polarized business cycles," Working Papers 13-44, Federal Reserve Bank of Philadelphia.
  9. Gonzalez-Astudillo, Manuel, 2011. "Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy," MPRA Paper 29976, University Library of Munich, Germany.
  10. Steffen Henzel & Elisabeth Wieland, 2013. "Synchronization and Changes in International Inflation Uncertainty," CESifo Working Paper Series 4194, CESifo Group Munich.
  11. Mumtaz, Haroon & Theodoridis, Konstantinos, 2012. "The international transmission of volatility shocks: an empirical analysis," Bank of England working papers 463, Bank of England.

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