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, Keho, and Kydland (1994)(BKK)model fails to reproduce this novel empirical evidence. We aug-ment 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 con-sistent with the data.
BKK the EZ Way: international long-run growth news and capital flows
Croce, Mariano M.;
2018
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, Keho, and Kydland (1994)(BKK)model fails to reproduce this novel empirical evidence. We aug-ment 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 con-sistent with the data.
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