Three essays on macroeconomic volatility

Abstract

[…] The objective of this study is to fill the aforementioned gaps in the literature in the following way: extending the work of Driskill and McCafferty (1980) by including an output equation in order to account for domestic fiscal and international factors, we derive theoretically the determinants of exchange rate and output volatilities, assuming rational expectations under flexible exchange rates. At this point we address the role of the comovement of monetary and fiscal variables in the determination of exchange rate and output variability. Regarding the empirical investigation, we estimate multivariate GARCH models including all the variables of interest in the system specification. At a first stage, conditional variance and covariance vectors are computed. At a second stage a reduced form model is estimated in order to test for the causality of the proposed determinants of exchange rate and output volatilities, both in the short and long run. Therefore, the contribution of this dissertation is fourfold: First, we extend the model of Driskill and McCafferty (1980). Second, empirical analysis is conducted in order to explore the determinants of output volatility. Third, the empirical investigation of exchange rate volatility determinants is undertaken. Fourth, we use multivariate GARCH (BEKK) models for the simultaneous determination of volatility proxies of macroeconomic variables. The underlying questions of the study are the following: • Are changes in monetary and fiscal policy significant driving forces of exchange rate and output volatilities? • Does the volatility of international factors explain the fluctuations in exchange rate and output? • What is the role of the covariance of selected macroeconomic variables in the determination of volatility both in exchange rate and output? Is it significant? • What is the contribution of exchange rate regimes in the behavior of nominal and real exchange rate volatility? Two applications are undertaken to study the determinants of exchange rate and output volatilities. The first one considers the explanatory factors of output volatility for the sample of the G3 countries, namely, Germany, Japan and the U.S. over the period 1974- 2009 using quarterly data. The second application examines the determinants of nominal and real exchange rate volatility in three Latin American countries, namely, Argentina, Bolivia and Chile, using monthly data for the period 1979-2009. […]