New study reveals how information bias impacts global economic cycles
The article explains how information bias affects international business cycles. By using a model with financial frictions and departing from full-information rational expectations, the researchers show that home information bias can lead to low consumption correlation, solve the quantity puzzle, create deviations from uncovered interest parity, and result in a countercyclical trade balance. This mechanism is supported by empirical evidence and remains robust even with different levels of frictions in the economy.