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Consumer Preferences and the Reliability of Euler Equation Tests of Capital Mobility — Some Simulation-Based Evidence

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Author Info
Claudia M. Buch
Joerg Doepke
Christian Pierdzioch

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Abstract

The globalization of international financial markets has renewed interest in the measurement of capital mobility. Consumption-based tests such as the Euler equation test are commonly used. These tests, however, are derived under restrictive assumptions on consumer behavior. In this paper, we ask how the Euler equation test of capital mobility performs if these restrictive assumptions are relaxed. We simulate a dynamic general equilibrium two-country model under alternative assumptions regarding consumer preferences and use the simulated time series to test for the degree of capital mobility. We find that the Euler equation test discriminates fairly well between high and low capital mobility regimes even if the restrictive assumptions on consumer behavior used to derive the test are not satisfied.

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Publisher Info
Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1131.

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Length: 33 pages
Date of creation: Oct 2002
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Handle: RePEc:kie:kieliw:1131

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Related research
Keywords: international capital mobility; Euler equation tests; consumption smoothing; new open economy macro models;

Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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