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International Business Cycles: Information Matters

Eleni Iliopulos, Erica Perego () and Thepthida Sopraseuth ()

Working Papers from CEPII research center

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 (search for similar items in EconPapers)
JEL-codes: D84 E44 E51 F41 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2019-02
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Working Paper: International business cycles: Information matters (2018) Downloads
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