A1 - Eleni Iliopulos
A1 - Erica Perego
A1 - Thepthida Sopraseuth
TI - International Business Cycles: Information Matters
IS - 2019-03
T3 - Working Papers
KW - Financial Frictions
KW - International Business Cycles
KW - Learning
KW - Uncovered Interest Rate Parity
N2 - We study the international transmission of shocks when agents form expectations under adaptive learning and imperfect information. To this aim we consider a two-country model featuring financial frictions, nominal rigidities, learning and Home information bias (as a source of information imperfection). We show that the more pronounced the Home information bias, the less agents track the international transmission of shocks, as it would otherwise be the case under rational expectations. The model succeeds in matching the low business cycle synchronization of consumption, while generating a positive output co-movement. In doing so, the model takes the theory closer to the data with respect to the output-consumption co-movement anomaly. The model also exhibits departure from the Uncovered Interest rate Parity.
ER -