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BKK the EZ Way: International Long-Run Growth News and Capital Flows

  • Ric Colacito
  • Max Croce
  • Steven Ho
  • Philip Howard
American Economic Review
vol. 108, no. 11, November 2018
(pp. 3416-49)
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Abstract

We 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.

Citation

Colacito, 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

Additional Materials

JEL Classification

  • 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