Elastic attention, risk sharing, and international comovements

Wei Li, Yulei Luo () and Jun Nie

No RWP 15-16, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: 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.

Keywords: Rational inattention; Elastic capacity; Risk sharing; International consumption correlations (search for similar items in EconPapers)
JEL-codes: D83 E21 F41 G15 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-12-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
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Journal Article: Elastic attention, risk sharing, and international comovements (2017)
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