Working Paper: CEPR ID: DP12783
Authors: Riccardo Colacito; Mariano Massimiliano Croce; Steven Ho; Philip Howard
Abstract: We study the response of international investment flows to short- and long-rungrowth news. Among developed G7 countries, positive long-run news for domesticproductivity induces a net outflow of investments, in contrast to the effects ofshort-run growth shocks. We document that a standard Backus, Kehoe, and Kydland(1994) (BKK) model fails to reproduce this novel empirical evidence. We augmentthis model with Epstein and Zin (1989) preferences (EZ-BKK) and characterizethe resulting recursive risk-sharing scheme. The response of internationalcapital flows in the EZ-BKK model is consistent with the data.
Keywords: No keywords provided
JEL Codes: C62; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive long-run news for domestic productivity (O49) | net outflow of investments (F21) |
| positive short-run growth shocks (O49) | capital inflows (F21) |
| positive long-run news for domestic productivity (O49) | decreases in marginal utility (D11) |
| decreases in marginal utility (D11) | net outflow of investments (F21) |
| short-run shocks (E32) | increased investment inflows (F21) |