Inattentive Consumers and Exchange Rate Volatility

Inattentive Consumers and Exchange Rate Volatility

Title : Inattentive Consumers and Exchange Rate Volatility
Number : 13/25
Author(s) : Mehmet Fatih Ekinci
Language : English
Date : July 2013
Abstract : We present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped, consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small.
Keywords : Sticky Information, Exchange Rate Volatility
JEL Codes : F31; F41

 

Inattentive Consumers and Exchange Rate Volatility
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