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Risk Matters: The Real Effects of Volatility Shocks

  • Pablo Guerron

    (North Carolina State University;)

  • Martin Uribe

    (Columbia University)

  • Juan Rubio-Ramirez

    (Duke University;)

  • Jesus Fernandez-Villaverde

    (University of Pennsylvania;)

volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle lter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We nd that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 281.

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Date of creation: 2010
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Handle: RePEc:red:sed010:281
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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