Risk Matters: The Real Effects of Volatility Shocks

Jesús Fernández-Villaverde, Pablo A. Guerrón-Quintana, Juan Rubio-Ramírez, Martín Uribe

NBER Working Paper No. 14875
Issued in April 2009
NBER Program(s):   EFG

This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying 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 filter 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 find 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.

download in pdf format
   (548 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14875

Published: Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-61, October. citation courtesy of

Users who downloaded this paper also downloaded* these:
Fernández-Villaverde and Rubio-Ramírez w16618 Macroeconomics and Volatility: Data, Models, and Estimation
Fernández-Villaverde, Guerrón-Quintana, Kuester, and Rubio-Ramírez w17317 Fiscal Volatility Shocks and Economic Activity
Bloom, Floetotto, Jaimovich, Saporta-Eksten, and Terry w18245 Really Uncertain Business Cycles
Fernández-Villaverde, Guerrón-Quintana, and Rubio-Ramírez w18399 Estimating Dynamic Equilibrium Models with Stochastic Volatility
Gourio w15399 Disasters Risk and Business Cycles
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us