Do Local Forecasters Have Better Information?

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Using 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 foreign forecasters’ less accurate forecasts are not due to more irrational expectations, but to less precise information. The asymmetry is stronger at shorter horizons and when forecasting inflation. In general, the asymmetry is not stronger when forecasting is more uncertain. Additionally, we find evidence that this informational advantage is linked both to barriers to information, like linguistic distance, and to economic incentives to acquire information. 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.