BKK the EZ Way. International Long-Run Growth News and Capital Flows
Mariano Massimiliano Croce,
Steven Ho and
No 12783, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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.
JEL-codes: C62 F31 G12 (search for similar items in EconPapers)
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