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
- 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 External Linkhttps://doi.org/10.18651/RWP2015-16
- 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 External Linkhttp://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 External Linkhttp://doi.org/ 10.1111/jeea.12125
- Christopher Sims. 2010. “Rational inattention and monetary economics,” Handbook of Monetary Economics, Vol. 3, 155-181. Available at External Linkhttp://doi.org/10.1016/B978-0-444-53238-1.00004-1