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

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

No 12783, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

JEL-codes: C62 F31 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
Date: 2018-03
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