BKK the EZ Way: International Long-Run Growth News and Capital Flows
Posted: 18 Nov 2012 Last revised: 10 Mar 2017
Date Written: March 5, 2017
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.
Keywords: International Investment Flows, Long-Run Growth News, Recursive Preferences
JEL Classification: C62, F31, G12
Suggested Citation: Suggested Citation