Do Local Forecasters Have Better Information?

Abstract

Using individual inflation and GDP growth forecasts by professional forecasters for a panel of emerging and advanced economies, we provide direct evidence that foreign forecasters update their forecasts less frequently than local forecasters (about 10% less frequently) and make larger errors in absolute value (up to 9% larger). The local forecasters' more accurate expectations are not due to a more irrational expectation formation by foreigners, but to local forecasters' more precise information. The asymmetry is stronger at shorter horizons and when forecasting inflation. In general, the asymmetry is not weaker when forecasting is less uncertain. Taken together, our results provide a basis for disciplining international finance and trade models with heterogeneous information. On the methodological side, we provide tests that identify differences in information frictions across groups.

Keywords: Information asymmetries, Expectation formation

JEL Classification: E3, E7, D82