The real effects of global risk shocks in small open economies

Available from: 
October 2013
Paper author(s): 
Javier Garcia Cicco (Universidad Católica Argentina)
Macroeconomics - Economic growth - Monetary Policy

This paper analyzes the impact of volatility shocks to both interest rates and terms of trade for small open economies. In particular, we estimate a stochastic volatility model for four variables using Chilean data: two interest rates (a world risk free rate and an emerging country premium) and two terms-of-trade series (commodities and non-commodities). We feed these processes into a multi-sector model of a small open economy featuring non-traded goods. The model is solved using a third-order approximation of the policy function, and calibrated to match several moments of Chilean macroeconomic aggregates. The results show that the domestic effects of external volatility shocks differ, both qualitative and quantitatively, depending on the source of risk. In particular, they depend on whether the volatility shock affects the ability to borrow abroad or not, and on whether the higher risk is associated with an endowment income or if it is related to a sector that uses adjustable inputs for production. A key assumption to reach these conclusions is the free mobility of labor across sectors.


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Research section: 
Lacea 2013 annual meeting
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