Inattentive consumers and international business cycles
Journal of International Money and Finance, 2017, vol. 72, issue C, 1-27
This paper presents and studies the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. Introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, exchange rate volatility observed in the data can be addressed for reasonable values of risk aversion. The model generates 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. The decline in the correlation is quantitatively small for our benchmark model. Model generates a substantial amount of consumer forecast errors when producers are attentive and productivity shocks are persistent. This specification results in a large decline of the correlation of real exchange rate and relative consumption due to consumer inattentiveness. When trade elasticity is set to values at the low end of macro estimates or at higher values consistent with sectoral estimates, the correlation is in the negative territory with inattentive consumers.
Keywords: Sticky information; Exchange rate volatility; Backus–Smith puzzle; Backus–Smith correlation (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:72:y:2017:i:c:p:1-27
Access Statistics for this article
Journal of International Money and Finance is currently edited by J. R. Lothian
More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().