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Federal Reserve Bank of Kansas City
Research Working Paper
Elastic attention, risk sharing, and international comovements
Jun Nie
Yulei Luo
Wei Li

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.

Download https://doi.org/10.18651/RWP2015-16
Cite this item
Jun Nie & Yulei Luo & Wei Li, Elastic attention, risk sharing, and international comovements, Federal Reserve Bank of Kansas City, Research Working Paper RWP 15-16, 01 Dec 2015.
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Keywords: Rational inattention; Elastic capacity; Risk sharing; International consumption correlations
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