Robustness, information–processing constraints, and the current account in small open economies

Yulei Luo (), Jun Nie and Eric Young

Journal of International Economics, 2012, vol. 88, issue 1, 104-120

Abstract: In this paper we examine the effects of two types of “induced uncertainty”, model uncertainty due to robustness (RB) and state uncertainty due to finite information–processing capacity (called rational inattention or RI), on consumption and the current account. We show that the combination of RB and RI improves the model's predictions for (i) the contemporaneous correlation between the current account and income and (ii) the volatility and persistence of the current account in small open emerging and developed economies. In addition, we show that the two informational frictions improve the model's ability to match the impulse response of consumption to income and the relative volatility of consumption to income growth.

Keywords: Robustness; Rational inattention; Consumption smoothing; Current account; Detection error probabilities (search for similar items in EconPapers)
JEL-codes: C61 D81 E21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (28)

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Working Paper: Robustness, information-processing constraints, and the current account in small open economies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:88:y:2012:i:1:p:104-120

DOI: 10.1016/j.jinteco.2012.02.004

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