Highlights :

• We study the international business cycle when agents form expectations under adaptive learning and imperfect information.
• We show that the more pronounced the Home information bias, the less agents track the impact of Foreign variables on Home dynamics and the more the international transmission of shocks is affected
• The model matches the low business cycle synchronization of consumption, while generating a positive, greater output co-movement taking the theory closer to the data with respect to the output-consumption co-movement anomaly.
• The model also exhibits and explains departure from the Uncovered Interest rate Parity.

 Abstract :
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.

 Keywords : Financial Frictions | International Business Cycles | Learning | Uncovered Interest Rate Parity

 JEL : D84, E44, E51, F41, F42