Question

A simple calibrated RBC model generates about what percentage of the volatility observed for real GDP in the actual data. Type your answer as a whole number.

The answer I got was 1030. Is this correct?

Answer 1

The four components of GDP—investment spending, net exports, government spending, and consumption—don’t move in lockstep with each other. In fact, their levels of volatility differ greatly. We can observe this in FRED by graphing the annual percent changes of each component. Investment (solid red) and net exports (solid yellow) are extremely volatile, varying greatly during economic contractions and expansions. In contrast, government spending (dashed blue) and consumption (dashed green) are highly stable; although they also vary with the business cycle, they do so to a much smaller extent. This pattern can be important for the effectiveness of monetary policy. According to economic textbooks, when the Fed lowers interest rates, investment spending and U.S. exports become cheaper, all else being equal. So, when the Fed lowers rates, it affects the two variables that disproportionately contribute to any given change in GDP.

The amount of capital spent by businesses is the most volatile component of GDP. This may indicate that business spending is the most economically sensitive of all components.

The five main components of the GDP are: (private) consumption, fixed investment, change in inventories, government purchases (i.e. government consumption), and net exports. Traditionally, the U.S. economy's average growth rate has been between 2.5% and 3.0%.

Private companies contribute 87% of the annual GDP, and Government 13%.
...
The most important industry groups are:

A)Manufacturing, 12%

B)Finance, insurance, real estate, rental, and leasing, 20%

C)Professional and business services, 12%

D) Educational services, health care, and social services, 8%.

The traditional marshallian rule of investing (abandoning) when the value of an underlying asset is above (below) the cost of an alternative investment is modified in the presence of uncertainty and irreversibility giving rise to an option component into decisions. This component is affected by the degree of volatility of underlying assets, which in turn can derive their volatility from the economy as a whole, affecting the investment process and therefore the accumulation of capital and future growth. In the same tense, the evidence of volatility in the returns of the underlying assets of the economy affects the market value of debt contracts, conveying recommendations regarding the financial architecture of the economy and the type of financial instruments better suited. The paper explores the application of contingent claims analysis both to the potential effect of macro volatility on aggregate investment, and to the effect on the presence of high levels of indebtedness of the economy, with a special application to the Argentinean economy where we obtain that economies with high level of volatility would require a significant level of internal saving and capital markets driven mainly by equity instruments of financing, which helps to better accommodate uncertainty by means of the price of assets.

In the study of economic growth it is often emphasized the analysis of the average rate of growth of both the economy as a whole and the per capita GDP; however the standard deviation of the rate of growth could be relevant as well to explain the aggregate process of investing, real capital accumulation and economic growth. In line with this and aimed to emerging markets, its is possible to identify literature about structural volatility of an economy, generally related to the institutional environment of the economy and the financial system as a whole. Caballero and Krishnamurty (1998) associate high volatility periods to the lack of sufficient collateral in the economy (not enough external collateral first, affecting then the availability of internal collateral), this suggestion is extended in Caballero and Krishnamurty (2001), while Caballero (2000a and 2000b) study evidence of volatility in Latin America in three case studies of countries, associating it to weak international links (real and financial) and to underdeveloped domestic financial system, which makes the economy sensitive to changes in the direction of international capital movements. These considerations regarding vulnerability to changes in capital flows is subject of study in Calvo (1998) through a “balance sheet” approach linking the flow of international capital, the level of net external assets and the current account of an economy, where a sudden reversal in the direction of capital flows may give rise to a crisis in economies highly dependant of them. More recently Ridditz (2003) relates volatility in per capita GDP to liquidity of the financial system, finding evidence that more liquidity in the system tends to reduce volatility (intuitively, the existence of credit smoothes the changes in aggregate demand).