Robustness, information–processing constraints, and the current account in small open economies

Luo, Yulei; Nie, Jun; Young, Eric

doi:10.1016/j.jinteco.2012.02.004

Cited by 25 publications

(15 citation statements)

References 47 publications

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“…in Alternative 2 in which LFI countries' risk-free rate increases from 3% to 4% after financial integration, the associated welfare gain for LFI countries switches from negative to positive. The improvement in welfare for the LFI countries is again due to an increase in the risk-free rate that offsets the decrease in growth as can be seen using our welfare-change formula (39).…”

Section: Alternative Calibrations: Different R In Lfi Countriesmentioning

confidence: 72%

“…1 models and disengagement from risky investmentóput emphasis on agents' decisions for worstcase scenarios, which means that these activities involved model uncertainty and not merely an increase in risk exposure. This paper is also largely motivated by recent findings in the literature that introducing model uncertainty helps solve the excess volatility puzzle (Djeutem and Kasa 2013) and the current account volatility puzzle (Luo, Nie, and Young 2012). Also, the welfare costs due to model uncertainty can be significant.…”

Section: Introductionmentioning

confidence: 95%

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Growth and Welfare Gains from Financial Integration Under Model Uncertainty

2018

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Section: Alternative Calibrations: Different R In Lfi Countriesmentioning

confidence: 72%

Section: Introductionmentioning

confidence: 95%

Growth and Welfare Gains from Financial Integration Under Model Uncertainty

2018

Self Cite

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“…When we estimate in the hybrid RE model with the same objective function, the estimated turns out to be zero in 11 out of 16 countries. 24 In our exercise, the improvement of predictions are achieved only under the information rigidity.…”

Section: Predictions Of the Si Modelsmentioning

confidence: 89%

“…On average,! is 0.64 24 The countries in which the estimated is zero are Australia, Austria, Belgium, Canada, Denmark, Finland, Iceland, Italy, Japan, Norway, and Sweden. We also …nd that the estimated turns out to be unity in four countries of France, Germany, the Netherlands, and the UK.…”

Section: Degrees Of Information Rigidity and Imperfect Capital Mobilitymentioning

confidence: 99%

Current account dynamics under information rigidity and imperfect capital mobility

Shibata

Shintani

Tsuruga

2019

Journal of International Money and Finance

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The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.

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“…However, these studies mainly focus on explaining nominal and real exchange rate dynamics rather than the international co‐movement of real variables. Luo, Nie, and Young () introduce the rational inattention to an intertemporal current account model. However, since the intertemporal current account model is a small open partial equilibrium model, it is not suitable for understanding cross‐country correlations.…”

Section: Introductionmentioning

confidence: 99%

Noisy information, risk sharing, and international business cycles

Guo

2019

Rev International Economics

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Standard international real business cycle (IRBC) models formulated by Kydland (BKK, 1992, 1995) have been considered a natural starting point to assess the quantitative implications of dynamic stochastic general equilibrium (DSGE) models in an open-economy environment.Since the standard IRBC model under assumptions of flexible prices and perfect competition cannot replicate all the observed characteristics of international business cycles, a number of extended models with more realistic features have been developed in the past decades. Most importantly, incorporating monopolistic competition and sticky prices, along with the monetary sector in open-economy DSGE models has been proven to be very successful in matching the data. In contrast to a large interest in the role of nominal rigidities, however, few studies have attempted to formally assess the quantitative implications of introducing informational frictions in the model. In this paper, we introduce a noisy information structure in an otherwise standard IRBC model and show that an extension in this direction is also useful in understanding some key features of international co-movements of output, consumption, and labor. AbstractWe introduce a noisy information structure into an otherwise standard international real business cycle model with two countries. When domestic firms observe current foreign technology with some noise, predictions of the model on international correlation can be very different from those of a standard perfect information model. We show that the model can explain: (a) positive output correlation both in complete and incomplete market models, (b) consumption correlation smaller than output correlation with an introduction of information-constrained consumers, and (c) observation of both positive and negative productivity-hours correlation in two countries. | GUOWe consider an imperfect information variant of a standard two-country bond economy IRBC model similar to the one used in Baxter and Crucini (1995) and Heathcote and Perri (2002), except that we exclude capital accumulation from the model. While we believe that an open-economy DSGE model with nominal rigidities is more realistic, we maintain the assumptions of perfect competition and flexible prices in this paper simply because they provide a reasonable benchmark in evaluating the pure effect of imperfect information on the international business cycle properties. In terms of explaining the international co-movements, the original BKK model predicts negative (or near-zero) output correlation, near-perfect consumption correlation, and negative correlation of factors of production, all of which contradict the data. To improve the performance of the model, Baxter and Crucini (1995) and Kollman (1996) replaced the complete market assumption of the BKK model with the incomplete market assumption, so that consumers only have access to a real bond market. A convenient approach to ensure a unique stationary solution to an open-economy model of incomplete market is to impose a (smal...

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Robustness, information–processing constraints, and the current account in small open economies

Cited by 25 publications

References 47 publications

Growth and Welfare Gains from Financial Integration Under Model Uncertainty

Growth and Welfare Gains from Financial Integration Under Model Uncertainty

Current account dynamics under information rigidity and imperfect capital mobility

Noisy information, risk sharing, and international business cycles

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