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Market-Based Solutions to Vital Economic Issues
Research
Mar 10, 2017

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

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.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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