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Interpreting Volatility Shocks as Preference Shocks

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  • Shaofeng Xu

Abstract

This paper examines the relationship between volatility shocks and preference shocks in an analytically tractable endogenous growth model with recursive preferences and stochastic volatility. I show that there exists an explicit mapping between volatility shocks and preference shocks, and a rise in volatility generates the same impulse responses of macroeconomic aggregates as a negative preference shock.

Suggested Citation

  • Shaofeng Xu, 2016. "Interpreting Volatility Shocks as Preference Shocks," Staff Working Papers 16-45, Bank of Canada.
    • Handle: RePEc:bca:bocawp:16-45
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    Cited by:

    1. Lodge, David & Manu, Ana-Simona, 2019. "EME financial conditions: which global shocks matter?," Working Paper Series 2282, European Central Bank.
    2. Xu, Shaofeng, 2017. "Volatility risk and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 17-33.

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    More about this item

    Keywords

    Business fluctuations and cycles; Economic models;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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