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Elastic attention, risk sharing, and international comovements

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  • Li, Wei
  • Luo, Yulei
  • Nie, Jun

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.

Suggested Citation

  • Li, Wei & Luo, Yulei & Nie, Jun, 2017. "Elastic attention, risk sharing, and international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 1-20.
  • Handle: RePEc:eee:dyncon:v:79:y:2017:i:c:p:1-20
    DOI: 10.1016/j.jedc.2017.03.009
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    Cited by:

    1. Shibata, Akihisa & Shintani, Mototsugu & Tsuruga, Takayuki, 2019. "Current account dynamics under information rigidity and imperfect capital mobility," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 153-176.
    2. repec:eee:jetheo:v:172:y:2017:i:c:p:55-87 is not listed on IDEAS
    3. Luo, Yulei & Nie, Jun & Wang, Gaowang & Young, Eric R., 2017. "Rational inattention and the dynamics of consumption and wealth in general equilibrium," Journal of Economic Theory, Elsevier, vol. 172(C), pages 55-87.

    More about this item

    Keywords

    Rational inattention; Elastic capacity; Risk sharing; International consumption correlations;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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