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; NBER

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Steven Wei Ho

University of Nevada, Las Vegas; Columbia University, Graduate School of Arts and Sciences, Department of Economics

Philip Howard

Wake Forest University - School of Business; University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise

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://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Steven Wei Ho

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

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

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

Philip Howard

Wake Forest University - School of Business ( email )

Farrell Hall 363
1834 Wake Forest Rd
Winston-Salem, NC 27109
United States

HOME PAGE: http://www.philiphoward.info

University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

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