BKK the EZ Way: International Long-Run Growth News and Capital Flows
- (pp. 3416-49)
AbstractWe study the response of international investment flows to short- and long-run growth news. Among developed G7 countries, positive long-run news for domestic productivity induces a net outflow of investments, in contrast to the effects of short-run growth shocks. We document that a standard Backus, Keho, and Kydland (1994) (BKK) model fails to reproduce this novel empirical evidence. We augment this model with Epstein and Zin (1989) preferences (EZ-BKK) and characterize the resulting recursive risk-sharing scheme. The response of international capital flows in the EZ-BKK model is consistent with the data.
CitationColacito, Ric, Max Croce, Steven Ho, and Philip Howard. 2018. "BKK the EZ Way: International Long-Run Growth News and Capital Flows." American Economic Review, 108 (11): 3416-49. DOI: 10.1257/aer.20141123
- F14 Empirical Studies of Trade
- F32 Current Account Adjustment; Short-term Capital Movements
- F43 Economic Growth of Open Economies
- G12 Asset Pricing; Trading Volume; Bond Interest Rates