Stochastic Volatility and DSGE Models
CREATES Research Paper No. 2009-29
10 Pages Posted: 9 Jul 2009
Date Written: July 8, 2009
This paper argues that a specification of stochastic volatility commonly used to analyze the Great Moderation in DSGE models may not be appropriate, because the level of a process with this specification does not have conditional or unconditional moments. This is unfortunate because agents may as a result expect productivity and hence consumption to be inifinite in all future periods. This observation is followed by three ways to overcome the problem.
Keywords: Great Moderation, Productivity shocks, and Time-varying coefficients
JEL Classification: E10, E30
Suggested Citation: Suggested Citation