JACIII Vol.22 No.6 pp. 846-852
doi: 10.20965/jaciii.2018.p0846


Modeling the Effect of Interest Rate Uncertainty on Residents’ Consumption – Based on a DSGE Model Embedded Stochastic Volatility

Xiaowen Hu, Chengchen Hu, and Yiyu Yao

School of Economic and Management, Anhui Normal University
189 Huajin South Road, Wuhu City, Anhui 241002, China

Corresponding author

October 1, 2017
December 28, 2017
October 20, 2018
interest rate uncertainty, household consumption, stochastic volatility, dynamic stochastic general equilibrium model

Modeling the effect of uncertainty shock usually employs VAR method. The approach however often leads to the results unstable with different structural equations. Especially it is modeled without a microscopic basis which often implies wrong policy advice. A new method to model the effect of interest rate uncertainty is proposed in this paper that overcomes this limitation. A stochastic volatility model is embedded into a dynamic stochastic general equilibrium framework to study the influence of interest rate uncertainty on the residents’ consumption. Using the third-order perturbation method to identify the impact of interest rate uncertainty on consumption. It is found by simulation that with the interest rate uncertainty increased, the consumption of residents in the current period has obviously decreased due to the preventive saving mechanism. Variance analysis shows that interest rate uncertainty shocks can explain 8% share of consumption volatility. The empirical results are robust when changing the parameter values and the prior distribution of the parameters. The conclusion shows the government should strengthen to guide the public reasonable expectations, to avoid the negative impact of interest rate uncertainty.

Cite this article as:
X. Hu, C. Hu, and Y. Yao, “Modeling the Effect of Interest Rate Uncertainty on Residents’ Consumption – Based on a DSGE Model Embedded Stochastic Volatility,” J. Adv. Comput. Intell. Intell. Inform., Vol.22 No.6, pp. 846-852, 2018.
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