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

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  • Colacito, Riccardo
  • Croce, Mariano Massimiliano
  • Ho, Steven
  • Howard, Philip

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, Kehoe, 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.

Suggested Citation

  • Colacito, Riccardo & Croce, Mariano Massimiliano & Ho, Steven & Howard, Philip, 2018. "BKK the EZ Way. International Long-Run Growth News and Capital Flows," CEPR Discussion Papers 12783, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12783
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    Cited by:

    1. David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2018. "Stochastic Impatience and the Separation of Time and Risk Preferences," PIER Working Paper Archive 18-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Sep 2018.

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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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