Stochastic Volatility and DSGE Models

CREATES Research Paper No. 2009-29

10 Pages Posted: 9 Jul 2009

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Date Written: July 8, 2009

Abstract

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

Andreasen, Martin M., Stochastic Volatility and DSGE Models (July 8, 2009). CREATES Research Paper No. 2009-29, Available at SSRN: https://ssrn.com/abstract=1431370 or http://dx.doi.org/10.2139/ssrn.1431370

Martin M. Andreasen (Contact Author)

Aarhus University ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

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