Learning and cross-country correlations in a multi-country DSGE model

International spillovers in estimated multi-country dynamic stochastic general equilibrium models with trade are usually limited. The correlation of nominal and real variables across countries is small unless the correlation of exogenous shocks is imposed. This paper shows that introducing adaptive learning with time-varying coefficients and simple forecasting models increases the international correlation. I use an estimated medium-scale two-country model, which features the euro area, the United States, and an exogenous rest of the world, with endogenous exchange rate determination. This paper shows that the increase in international correlation stems from the varying coefficients and the use of simple forecasting models.