Inattentive Consumers and Exchange Rate Volatility

Mehmet Ekinci

MPRA Paper from University Library of Munich, Germany

Abstract: We present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small.

Keywords: Sticky Information; Exchange Rate Volatility (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Date: 2010-10-31, Revised 2010-10-31
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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https://mpra.ub.uni-muenchen.de/26472/1/MPRA_paper_26472.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/29149/1/MPRA_paper_29149.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26472

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