Speaker：LI Wei, associate professor, College of Business, Shanghai University of Finance and Economics
Venue：Room 530, School of Economics, Zijingang Campus
We study the consumption-portfolio decision of a household with limited information-processing ca-pacity (rational inattention) in a two-country equilibrium model under recursive utility. Our rationally inattentive household reacts gradually to asset return innovations and naturally concerns about long-run consumption risk, which implies less volatile and less cross-country correlated stochastic discount factors. Despite the high correlation of international stock markets, we are able to generate 1) relative consumption growth and real exchange rate depreciations has a correlation close to zero or negative (Backus-Smith puzzle); 2)fluctuations in exchange rate is not so volatile; 3)consumption is less volatile than real exchange rate.