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Elastic attention, risk sharing, and international comovements

Wei Li, Yulei Luo () and Jun Nie

Journal of Economic Dynamics and Control, 2017, vol. 79, issue C, 1-20

Abstract: In this paper we examine the effects of elastic information-processing capacity (or elastic attention) 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, elastic attention due to a 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 elastic attention can improve the model’s predictions for the other key moments of the joint dynamics of consumption and income.

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)
Date: 2017
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Working Paper: Elastic attention, risk sharing, and international comovements (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:79:y:2017:i:c:p:1-20

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