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Article: Robust Control, Informational Frictions, and International Consumption Correlations

TitleRobust Control, Informational Frictions, and International Consumption Correlations
Authors
Issue Date2014
PublisherELSEVIER. The Journal's web site is located at http://www.elsevier.com/locate/eer
Citation
European Economic Review , 2014, v. 67, p. 1-27 How to Cite?
AbstractIn this paper we examine the effects of model misspecification (robustness or RB) on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation. We show that in the presence of capital mobility in financial markets, RB lowers the international consumption correlations by generating heterogeneous responses of consumption to productivity shocks across countries facing different macroeconomic uncertainty. In addition, we show that RB can also improve the model's predictions in three other moments of consumption dynamics: the relative volatility of consumption to income, the persistence of consumption, and the correlation between consumption and output. After calibrating the RB parameter using the detection error probabilities, we show that the model can explain the observed international consumption correlations as well as the other consumption moments quantitatively. Finally, we show that the main conclusions of our benchmark model do not change in an extension in which the agent cannot observe the state perfectly due to finite information-processing capacity.
Persistent Identifierhttp://hdl.handle.net/10722/203524
SSRN
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorLuo, Yen_US
dc.contributor.authorNie, Jen_US
dc.contributor.authorYoung, Een_US
dc.date.accessioned2014-09-19T15:25:40Z-
dc.date.available2014-09-19T15:25:40Z-
dc.date.issued2014en_US
dc.identifier.citationEuropean Economic Review , 2014, v. 67, p. 1-27en_US
dc.identifier.urihttp://hdl.handle.net/10722/203524-
dc.description.abstractIn this paper we examine the effects of model misspecification (robustness or RB) on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation. We show that in the presence of capital mobility in financial markets, RB lowers the international consumption correlations by generating heterogeneous responses of consumption to productivity shocks across countries facing different macroeconomic uncertainty. In addition, we show that RB can also improve the model's predictions in three other moments of consumption dynamics: the relative volatility of consumption to income, the persistence of consumption, and the correlation between consumption and output. After calibrating the RB parameter using the detection error probabilities, we show that the model can explain the observed international consumption correlations as well as the other consumption moments quantitatively. Finally, we show that the main conclusions of our benchmark model do not change in an extension in which the agent cannot observe the state perfectly due to finite information-processing capacity.en_US
dc.languageengen_US
dc.publisherELSEVIER. The Journal's web site is located at http://www.elsevier.com/locate/eeren_US
dc.relation.ispartofEuropean Economic Reviewen_US
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in <Journal title>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL#, ISSUE#, (DATE)] DOI#en_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleRobust Control, Informational Frictions, and International Consumption Correlationsen_US
dc.typeArticleen_US
dc.identifier.emailLuo, Y: yluo@econ.hku.hken_US
dc.identifier.authorityLuo, Y=rp01083en_US
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.euroecorev.2013.12.007-
dc.identifier.hkuros235187en_US
dc.identifier.volume67en_US
dc.identifier.spage1en_US
dc.identifier.epage27en_US
dc.identifier.isiWOS:000334083800001-
dc.publisher.placeAmsterdamen_US
dc.identifier.ssrn2360434-

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