International business cycles: Information matters

Eleni Iliopulos, Erica Perego and Thepthida Sopraseuth

Journal of Monetary Economics, 2021, vol. 123, issue C, 19-34

Abstract: We propose a mechanism that explains standard stylized facts in both international macroeconomics and international finance. To do so, we develop a New Keynesian DSGE model with financial frictions à la Bernanke et al. (1999), in which we depart from the full-information rational expectations (FIRE) assumption. The key ingredient is home information bias (HIB) in expectations. While the FIRE model predicts high consumption co-movements, no departure from uncovered interest parity (UIP) and procyclical trade balance, assuming HIB makes the model consistent with the data by producing low consumption correlation, solving the quantity puzzle, generating endogenous departures from the UIP and matching a countercyclical trade balance. The mechanism is empirically validated and shown to be robust to the extent of frictions in the economy.

Keywords: International business cycles; Uncovered interest rate parity; Home information bias; Learning (search for similar items in EconPapers)
JEL-codes: D84 E44 F32 F41 F42 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: International business cycles: Information matters (2021)
Working Paper: International Business Cycles: Information Matters (2019)
Working Paper: International business cycles: Information matters (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:123:y:2021:i:c:p:19-34

DOI: 10.1016/j.jmoneco.2021.06.001

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