Elastic Attention, Risk Sharing, and International Comovements

By Jun Nie, Senior Economist , Yulei Luo and Wei Li


  Download paper, RWP 15-16, December 2015

In this paper we examine the effects of elastic information-processing capacity (or optimal inattention) proposed in Sims (2010) on international consumption and income correlations in a tractable small open economy (SOE) model with exogenous income processes. We find that in the presence of capital mobility in financial markets, optimal inattention due to fixed information-processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty. In addition, we show that RI can also improve the model's predictions for the other key moments of the joint dynamics of consumption and income. Finally, we show that the main conclusions of our benchmark model do not change in an extension with capital accumulation.

JEL Classification: D83, E21, F41, G15

Article Citation

  • Nie, Jun,  Yasuo, Yulei Luo, and Wei Li. 2015. “Elastic Attention, Risk Sharing, and International Comovements,” Federal Reserve Bank of Kansas City, working paper no. 15-16, December. Available at https://doi.org/10.18651/RWP2015-16

Related Research

  • Luo, Yulei, Jun Nie, and Eric R. Young. 2014. “Robust control, informational frictions, and international consumption correlations,” European Economic Review, 67, 1-27. Available at http://doi.org/10.1016/j.euroecorev.2013.12.007
  • Luo, Yulei, Jun Nie, and Eric R. Young. 2015. “Slow information diffusion and the inertial behavior of durables consumption,” Journal of the European Economic Association, Vol. 13 Issue 5, 805-840. Available at http://doi.org/ 10.1111/jeea.12125
  • Christopher Sims. 2010. “Rational inattention and monetary economics,” Handbook of Monetary Economics, Vol. 3, 155-181. Available at http://doi.org/10.1016/B978-0-444-53238-1.00004-1

About the Author

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Jun Nie conducts research on unemployment and labor market policies, robustness and rational inattention, wealth inequality, and the Chinese economy. Read his bio.