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International business cycles: Information matters

Author

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  • Eleni Iliopulos
  • Erica Perego
  • Thepthida Sopraseuth

    (Université de Cergy-Pontoise, THEMA)

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.

Suggested Citation

  • Eleni Iliopulos & Erica Perego & Thepthida Sopraseuth, 2018. "International business cycles: Information matters," THEMA Working Papers 2018-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2018-13
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    More about this item

    Keywords

    financial frictions; interdependent economies; learning; uncovered interest rate parity.;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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