Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility

The current account in developed countries is highly persistent and volatile in
comparison to their output growth. The standard intertemporal current account model
with rational expectations (RE) fails to explain the observed current account and
consumption dynamics. The RE model extended with imperfect capital mobility by
Shibata and Shintani (1998) can account for the consumption dynamics, 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. 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 explains both the current account and consumption, provided that sufficiently
high degrees of information rigidity and imperfect capital mobility are considered.