2018 Discussion papers
School of Economics Discussion Paper 18/11
Endogenous Time-Varying Volatility and Emerging
Market Business Cycles
Jan-Philipp Dueber, University of Kent
Time-varying volatility plays a crucial role in understanding business cycles in emerging market economies. However, the literature treats volatility as an exogenous process. This paper endogenizes time-varying volatility in the debt premium and total factor productivity into a standard small open economy model and assesses the quality of the model by comparing it to emerging market data. An additional volatility channel that operates through the debt premium on the interest rate faced by a small open economy can generate countercyclical net exports and excess volatility in consumption as observed in data on emerging market business cycles.
JEL Classification: E32; F41; F44
Keywords: Endogenous Volatility, DSGE, Emerging Markets
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