Elastic Attention, Risk Sharing, and International Comovements

HKIMR Working Paper No.26/2015

49 Pages Posted: 19 Dec 2015

See all articles by Wei Li

Wei Li

The University of Hong Kong

Yulei Luo

University of Hong Kong

Jun Nie

Federal Reserve Bank of Kansas City

Date Written: December 17, 2015

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 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 also improve the model's predictions for 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

Suggested Citation

Li, Wei and Luo, Yulei and Nie, Jun, Elastic Attention, Risk Sharing, and International Comovements (December 17, 2015). HKIMR Working Paper No.26/2015. Available at SSRN: https://ssrn.com/abstract=2705252 or http://dx.doi.org/10.2139/ssrn.2705252

Wei Li (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Yulei Luo

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Jun Nie

Federal Reserve Bank of Kansas City ( email )

1 Memorial Drive
Kansas City, MO 64198
United States
(816) 881-2255 (Phone)
(816) 881-2199 (Fax)

HOME PAGE: http://homepages.nyu.edu/~jn461/research.htm

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