Robustness, Information-Processing Constraints, And The Current Account In Small Open Economies

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The authors examine the effects of two types of informational frictions, RoBustness (RB) and finite information-processing capacity (called Rational Inattention or RI) on the current account, in an otherwise standard Intertemporal Current Account (ICA) model. They show that the interaction of RB and RI has the potential to improve the model's predictions on the joint dynamics of the current account and income: the contemporaneous correlation between the current account and income, the volatility and persistence of the current account in small open emerging and developed economies.