Discussion paper

DP12783 BKK the EZ Way. International Long-Run Growth News and Capital Flows.

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.

£6.00
Citation

Croce, M and R Colacito (2018), ‘DP12783 BKK the EZ Way. International Long-Run Growth News and Capital Flows. ‘, CEPR Discussion Paper No. 12783. CEPR Press, Paris & London. https://cepr.org/publications/dp12783