Time-Varying Skewness and Real Business Cycles

44 Pages Posted: 3 Jul 2019 Last revised: 29 Apr 2020

See all articles by Lance Kent

Lance Kent

College of William and Mary - Department of Economics

Toan Phan

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

In the context of a quantitative real business cycle (RBC) model, we document that shocks to the higher-order moments, especially the skewness, of productivity can have large first-order effects on business cycles. We augment a standard small open economy RBC model with a new feature: a discrete regime switching between higher-order moments of total factor productivity shocks between an unrest state and a quiet state. To map the theory to data, we exploit an extensive database of mass political unrest around the world. We calibrate the model to the observed increases in the volatility and skewness of the growth rates of key economic variables during episodes of unrest. The calibrated model shows that increases in negative skewness play an important role in explaining the observed first-order decline in economic activities.

Keywords: volatility, skewness shocks, total factor productivity, business cycles

Suggested Citation

Kent, Lance and Phan, Toan, Time-Varying Skewness and Real Business Cycles (2019). Economic Quarterly, Issue 2Q, pp. 59-103, 2019, Available at SSRN: https://ssrn.com/abstract=3413329

Lance Kent (Contact Author)

College of William and Mary - Department of Economics ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

HOME PAGE: http://www.lancekent.org

Toan Phan

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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