Informational economic transmission between countries

Abstract

Informational economic transmission is crucial even after accounting for countries' fundamental real and financial connections. Informational connections emerge from anomalous interdependence in agents' beliefs about countries' economic activity. We propose measuring this interdependence through the correlation (between countries) of analysts' one-year forecast errors about countries' economic performance. Our measure is based on a learning model in which informational transmission occurs when agents incorrectly assess the quality of new information regarding common factors that affect multiple countries simultaneously, due to learning frictions. Informational interdependence remains substantial under various validity analyses and robustness checks, and after addressing endogeneity concerns in several dimensions. Additionally, we demonstrate considerable higher-order spillovers of economic shocks.