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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
    DOI: 10.34989/swp-2017-45
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    Cited by:

    1. Xu, Shaofeng, 2017. "Volatility risk and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 17-33.
    2. Lodge, David & Manu, Ana-Simona, 2022. "EME financial conditions: Which global shocks matter?," Journal of International Money and Finance, Elsevier, vol. 120(C).
    3. Kimberly A. Berg & Nelson C. Mark, 2024. "Uncertainty, Long‐Run, And Monetary Policy Risks In A Two‐Country Macro Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1387-1413, August.

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    Keywords

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    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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