Open Access. Powered by Scholars. Published by Universities.®
Social and Behavioral Sciences Commons™
Open Access. Powered by Scholars. Published by Universities.®
Articles 1 - 1 of 1
Full-Text Articles in Social and Behavioral Sciences
Robustness, Information-Processing Constraints, And The Current Account In Small Open Economies, Yulei Luo, Jun Nie, Eric R. Young
Robustness, Information-Processing Constraints, And The Current Account In Small Open Economies, Yulei Luo, Jun Nie, Eric R. Young
Yulei Luo
In this paper we examine the effects of two types of “induced uncertainty”, model uncertainty due to robustness (RB) and state uncertainty due to finite information-processing capacity (called rational inattention or RI), on consumption and the current account. We show that the combination of RB and RI improves the model’s predictions for (i) the contemporaneous correlation between the current account and income and (ii) the volatility and persistence of the current account in small open emerging and developed economies. In addition, we show that the two informational frictions improve the model’s ability to match the impulse response of consumption to …