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

Posted: 18 Nov 2012 Last revised: 10 Mar 2017

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of North Carolina Kenan-Flagler Business School

Steven Wei Ho

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Philip Howard

Wake Forest University - School of Business

Date Written: March 5, 2017

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.

Keywords: International Investment Flows, Long-Run Growth News, Recursive Preferences

JEL Classification: C62, F31, G12

Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano and Ho, Steven Wei and Howard, Philip, BKK the EZ Way: International Long-Run Growth News and Capital Flows (March 5, 2017). Available at SSRN: https://ssrn.com/abstract=2177231 or http://dx.doi.org/10.2139/ssrn.2177231

Riccardo Colacito

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.unc.edu/~colacitr

Mariano Massimiliano Croce (Contact Author)

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://https://sites.google.com/view/mmcroce/home

Steven Wei Ho

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://econ.columbia.edu/steven-ho

Philip Howard

Wake Forest University - School of Business ( email )

Farrell Hall 363
1834 Wake Forest Rd
Winston-Salem, NC 27109
United States
2262142839 (Phone)

HOME PAGE: http://sites.google.com/view/pdwhoward

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