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

Ric Colacito, Max Croce, Steven Ho and Philip Howard

American Economic Review, 2018, vol. 108, issue 11, 3416-49

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.

JEL-codes: F14 F32 F43 G12 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20141123
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