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Inattentive Consumers and Exchange Rate Volatility

  • Mehmet Fatih, Ekinci

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26472.

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Date of creation: 31 Oct 2010
Date of revision: 31 Oct 2010
Handle: RePEc:pra:mprapa:26472
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