Interpreting volatility shocks as preference shocks

Xu, Shaofeng

doi:10.1016/j.econlet.2016.07.028

Cited by 4 publications

(6 citation statements)

References 22 publications

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“…The last equality in (38) follows from the proportionality of the optimal consumption and investment with respect to capital as shown in Proposition 4, as well as the speci…cation of the capital accumulation process in (31). The equality implies that a decrease in all future consumption by a fraction is equivalent to giving up a fraction of its current capital stock.…”

Section: Volatility Risk and Welfarementioning

confidence: 92%

“…Equality (42) directly follows from (38) q is assumed to be positive to guarantee that the expectation E v [exp fa 1 vg] is well de…ned. It is straightforward to see that this condition is equivalent to + q ( + ) 2 + 2 (1 ) > , which is always true for 1 and holds for > 1 if > .…”

Section: Proof Of Propositionmentioning

confidence: 99%

“…The …rst strand examines channels through which changes in uncertainty a¤ect economic activity. Examples include Bloom (2009) Leduc and Liu (2016), and Xu (2016). These studies in general …nd a negative impact of uncertainty on economic activity, emphasizing, for example, its real-options e¤ect, risk-premium e¤ect, or precautionary-savings e¤ect on the choices of economic agents.…”

Section: Introductionmentioning

confidence: 99%

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Volatility risk and economic welfare

2017

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractThis paper examines the effects of time-varying volatility on welfare. I construct a tractable endogenous growth model with recursive preferences, stochastic volatility, and capital adjustment costs. The model shows that a rise in volatility can decelerate growth in the absence of any level shocks. In contrast to level risk, which is always welfare reducing for a risk-averse household, volatility risk can increase or decrease welfare, depending on model parameters. When calibrated to U.S. data, the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations. RésuméLa présente étude traite des effets sur le bien-être de la volatilité qui varie dans le temps. L'auteur construit un modèle à croissance endogène résoluble qui intègre des préférences récursives, une volatilité stochastique et des coûts d'ajustement du capital. Ce modèle montre qu'une hausse de la volatilité peut ralentir la croissance en l'absence de chocs de niveau. Contrairement au risque de niveau, qui conduit toujours à une perte de bien-être pour les ménages réfractaires au risque, le risque de volatilité peut faire augmenter ou diminuer le bien-être, selon les paramètres du modèle. Lorsque le modèle est calibré en fonction des données se rapportant aux États-Unis et nourri de paramètres plausibles, les résultats indiquent que la perte de bien-être liée au risque de volatilité est somme toute négligeable. Sujets : Cycles et fluctuations économiques ; Modèles économiques Codes JEL : E2 ; E3 Non-Technical SummarySince the late 2000s, there has been a growing literature that highlights time-varying volatility as a driver of business cycles. For example, studies have shown that the massive increase in uncertainty following the recent financial crisis was an important factor driving the depth of the Great Recession. The literature has so far mainly focused on the short-run real effects of volatility shocks. Little is known about the long-run welfare effects of volatility risk. Although it is widely accepted that larger uncertainty decreases growth and welfare, studies of the welfare impact of volatility risk, which implies the possibility of experiencing both high and low volatility, have been largely absent.This paper aims to fill part of the gap by analyzing the relationship between volatility risk and economic welfare in an analytically tractable growth model. The main findings of the paper are twofold. First, I show that in contr...

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Section: Volatility Risk and Welfarementioning

confidence: 92%

Section: Proof Of Propositionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Volatility risk and economic welfare

2017

Journal of Economic Dynamics and Control

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“…Figure 4 shows inflation impulse responses for the United States and Japan to the four positive United States shocks under DCP and symmetric monetary policy and productivity growth. Looking at both Figures 3 and 4, stochastic volatility shocks (uncertainty shocks) in our model have an interpretation as aggregate demand shocks, as in Xu (2016) and Leduc and Liu (2016). The positive United States stochastic volatility (SV) shock depresses output and inflation.…”

Section: Impulse Response Functionsmentioning

confidence: 89%

Uncertainty, Long-Run, and Monetary Policy Risks in a Two-Country Macro Model

Berg¹,

Mark²

2020

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“…Long-run risk shocks also contribute towards explaining the forward premium bias/anomaly. Stochastic volatility shocks in our model, as in Xu (2016) and Leduc and Liu (2016), are also aggregate demand shocks in the sense that an increase in uncertainty depresses output and inflation. Stochastic volatility shocks also make a large contribution to currency risk premium volatility, but they do not help to explain the forward premium bias.…”

Section: Introductionmentioning

confidence: 99%

Uncertainty, Long‐run, and Monetary Policy Risks in a Two‐country Macro Model

Berg,

Mark

2024

Int Economic Review

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We study the currency risk premium and the forward premium bias in a two‐country New Keynesian model with production, no physical capital, and recursive utility. Monetary policy follows an interest rate feedback rule and exogenous total factor productivity (TFP) growth follows a long‐run risk process with stochastic volatility, which we estimate from data. With cross‐country heterogeneity in TFP and monetary policy, reasonable currency risk premia emerge under complete and incomplete markets but the forward premium bias is trivial. We diagnose the challenge faced by this fairly standard production model to explain the forward premium bias.

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Interpreting volatility shocks as preference shocks

Cited by 4 publications

References 22 publications

Volatility risk and economic welfare

Volatility risk and economic welfare

Uncertainty, Long-Run, and Monetary Policy Risks in a Two-Country Macro Model

Uncertainty, Long‐run, and Monetary Policy Risks in a Two‐country Macro Model

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