Working Paper

Elastic attention, risk sharing, and international comovements


Abstract: In this paper we examine the effects of elastic information-processing capacity (or optimal inattention) 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, optimal inattention due to 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 RI can also improve the model's predictions for the other key moments of the joint dynamics of consumption and income. Finally, we show that the main conclusions of our benchmark model do not change in an extension with capital accumulation.

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

JEL Classification: D83; E21; F41; G15;

Access Documents

File(s): File format is text/html https://doi.org/10.18651/RWP2015-16
Description: https://doi.org/10.18651/RWP2015-16

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2015-12-01

Number: RWP 15-16

Pages: 43 pages