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BKK the EZ way. An International Production Economy with Recursive Preferences

Author

Listed:
  • Steven Ho

    (UNC Chapel Hill)

  • Philip Howard

    (UNC Chapel Hill)

  • Mariano Croce

    (University of North Carolina at Chapel H)

  • Riccardo Colacito

    (University of North Carolina, Chapel Hil)

Abstract

We characterize an international production economy in which (1) agents have Epstein and Zin (1989) preferences, (2) international productivity frontiers are exposed to both short- and long-run shocks, and (3) consumption features a larger degree of home bias relative to investment. Under our recursive risk-sharing scheme, good long-run news for domestic productivity creates a net outflow of domestic investments. This response accounts for the Backus, Kehoe and Kydland (1994) anomaly concerning the lower degree of correlation of international consumption relative to output. We document that our model is strongly consistent with novel empirical evidence on both international quantities and prices.

Suggested Citation

  • Steven Ho & Philip Howard & Mariano Croce & Riccardo Colacito, 2013. "BKK the EZ way. An International Production Economy with Recursive Preferences," 2013 Meeting Papers 112, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:112
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    Cited by:

    1. Gavazzoni, Federico & Santacreu, Ana Maria, 2020. "International R&D spillovers and asset prices," Journal of Financial Economics, Elsevier, vol. 136(2), pages 330-354.
    2. Nicole Branger & Patrick Konermann & Christoph Meinerding & Christian Schlag, 2021. "Equilibrium Asset Pricing in Directed Networks [Risk premia and term premia in general equilibrium]," Review of Finance, European Finance Association, vol. 25(3), pages 777-818.
    3. Chang, Yanqin & Smith, R. Todd, 2014. "Feldstein–Horioka puzzles," European Economic Review, Elsevier, vol. 72(C), pages 98-112.
    4. Hakon Tretvoll, 2013. "Investment-Specific Technology Shocks and Recursive Preferences," 2013 Meeting Papers 1207, Society for Economic Dynamics.
    5. Michael Siemer & Adrien Verdelhan & Francois Gourio, 2015. "Uncertainty and International Capital Flows," 2015 Meeting Papers 880, Society for Economic Dynamics.
    6. A Craig Burnside & Jeremy J Graveline, 2020. "On the Asset Market View of Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 33(1), pages 239-260.
    7. Robert Ready & Nikolai Roussanov & Colin Ward, 2017. "Commodity Trade and the Carry Trade: A Tale of Two Countries," Journal of Finance, American Finance Association, vol. 72(6), pages 2629-2684, December.
    8. Ready, Robert & Roussanov, Nikolai & Ward, Colin, 2017. "After the tide: Commodity currencies and global trade," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 69-86.
    9. Rouillard, Jean-François, 2018. "International risk sharing and financial shocks," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 26-44.
    10. Lance Kent & Toan Phan, 2019. "Time-Varying Skewness and Real Business Cycles," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 59-103.

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