Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12783.html
   My bibliography  Save this paper

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

Author

Listed:
  • Croce, Mariano
  • Colacito, Ric
  • Ho, Steven
  • Howard, Philip
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.

Suggested Citation

  • Croce, Mariano & Colacito, Ric & Ho, Steven & Howard, Philip, 2018. "BKK the EZ Way. International Long-Run Growth News and Capital Flows," CEPR Discussion Papers 12783, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12783
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP12783
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
    2. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    3. Robert Ready & Nikolai Roussanov & Colin Ward, 2017. "Commodity Trade and the Carry Trade: A Tale of Two Countries," Journal of Finance, American Finance Association, vol. 72(6), pages 2629-2684, December.
    4. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    5. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    6. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864, Elsevier.
    7. Erceg, Christopher J. & Guerrieri, Luca & Gust, Christopher, 2008. "Trade adjustment and the composition of trade," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2622-2650, August.
    8. Federico Mandelman & Pau Rabanal & Juan Francisco Rubio-Ramirez & Diego Vilan, 2011. "Investment Specific Technology Shocks and International Business Cycles: An Empirical Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 136-155, January.
    9. Xavier Gabaix & Matteo Maggiori, 2015. "International Liquidity and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1369-1420.
    10. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    11. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    12. Andrei A. Levchenko & Logan Lewis & Linda L. Tesar, 2009. "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," Working Papers 592, Research Seminar in International Economics, University of Michigan.
    13. Francois Gourio & Pierre-Alexandre Noual, 2006. "The Marginal Worker and the Aggregate Elasticity of Labor Supply," 2006 Meeting Papers 509, Society for Economic Dynamics.
    14. Karen K. Lewis, 2011. "Global Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 435-466, December.
    15. Luis García‐Feijóo & Randy D. Jorgensen, 2010. "Can Operating Leverage Be the Cause of the Value Premium?," Financial Management, Financial Management Association International, vol. 39(3), pages 1127-1154, September.
    16. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    17. Riccardo Colacito & Mariano M. Croce, 2013. "International Asset Pricing with Recursive Preferences," Journal of Finance, American Finance Association, vol. 68(6), pages 2651-2686, December.
    18. Tarek A. Hassan & Thomas M. Mertens, 2014. "Information Aggregation in a DSGE Model," NBER Working Papers 20193, National Bureau of Economic Research, Inc.
    19. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    20. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    21. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, vol. 119(1), pages 207-243, November.
    22. Rey, Hélène & Gourinchas, Pierre-Olivier, 2013. "External Adjustment, Global Imbalances and Valuation Effects," CEPR Discussion Papers 9566, C.E.P.R. Discussion Papers.
    23. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-854, November.
    24. Andrei A Levchenko & Logan T Lewis & Linda L Tesar, 2010. "The Collapse of International Trade during the 2008–09 Crisis: In Search of the Smoking Gun," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(2), pages 214-253, December.
    25. Mario Crucini & Ayhan Kose & Christopher Otrok, 2011. "What are the driving forces of international business cycles?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 156-175, January.
    26. Ayhan Kose, M. & Otrok, Christopher & Whiteman, Charles H., 2008. "Understanding the evolution of world business cycles," Journal of International Economics, Elsevier, vol. 75(1), pages 110-130, May.
    27. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    28. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115(1), pages 69-102.
    29. Anderson, Evan W., 2005. "The dynamics of risk-sensitive allocations," Journal of Economic Theory, Elsevier, vol. 125(2), pages 93-150, December.
    30. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 443-473.
    31. Tarek A. Hassan, 2013. "Country Size, Currency Unions, and International Asset Returns," Journal of Finance, American Finance Association, vol. 68(6), pages 2269-2308, December.
    32. repec:fth:nystbu:92-6 is not listed on IDEAS
    33. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    34. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    35. Raffo, Andrea, 2008. "Net exports, consumption volatility and international business cycle models," Journal of International Economics, Elsevier, vol. 75(1), pages 14-29, May.
    36. Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.
    37. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    38. Michele Cavallo & Anthony Landry, 2010. "The Quantitative Role of Capital Goods Imports in US Growth," American Economic Review, American Economic Association, vol. 100(2), pages 78-82, May.
    39. Hakon Tretvoll, 2012. "Real exchange rate variability in a two country business cycle model," 2012 Meeting Papers 911, Society for Economic Dynamics.
    40. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
    41. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    42. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    43. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and Measuring Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1026-1053, October.
    44. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887, Elsevier.
    45. Favilukis, Jack & Lin, Xiaoji, 2013. "Long run productivity risk and aggregate investment," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 737-751.
    46. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    47. Boileau, Martin, 1999. "Trade in capital goods and the volatility of net exports and the terms of trade," Journal of International Economics, Elsevier, vol. 48(2), pages 347-365, August.
    48. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    49. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2011. "US Trade and Inventory Dynamics," American Economic Review, American Economic Association, vol. 101(3), pages 303-307, May.
    50. Robert Ready & Mariano Croce & Federico Gavazzoni & Riccardo Colacito, 2016. "Currency Risk Factors in a Recursive Multi-Country Economy," 2016 Meeting Papers 297, Society for Economic Dynamics.
    51. Bansal, Ravi & Lundblad, Christian, 2002. "Market efficiency, asset returns, and the size of the risk premium in global equity markets," Journal of Econometrics, Elsevier, vol. 109(2), pages 195-237, August.
    52. Georg Kaltenbrunner & Lars A. Lochstoer, 2010. "Long-Run Risk through Consumption Smoothing," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3190-3224, August.
    53. Riccardo Colacito & Mariano M. Croce, 2011. "Risks for the Long Run and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 153-181.
    54. Massimiliano Croce, Mariano, 2014. "Long-run productivity risk: A new hope for production-based asset pricing?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 13-31.
    55. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    56. Quinn, Dennis, 1997. "The Correlates of Change in International Financial Regulation," American Political Science Review, Cambridge University Press, vol. 91(3), pages 531-551, September.
    57. Kurt F. Lewis & Francis A. Longstaff & Lubomir Petrasek, 2017. "Asset Mispricing," NBER Working Papers 23231, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gavazzoni, Federico & Santacreu, Ana Maria, 2020. "International R&D spillovers and asset prices," Journal of Financial Economics, Elsevier, vol. 136(2), pages 330-354.
    2. Engel, Charles & Bianchi, Javier & Bigio, Saki, 2021. "Scrambling for Dollars: International Liquidity, Banks and Exchange Rates," CEPR Discussion Papers 16712, C.E.P.R. Discussion Papers.
    3. George Alessandria & Carter Mix, 2021. "Trade Policy is Real News: Theory and Evidence," International Finance Discussion Papers 1330, Board of Governors of the Federal Reserve System (U.S.).
    4. Feng, Chaonan & Han, Liyan & Vigne, Samuel & Xu, Yang, 2023. "Geopolitical risk and the dynamics of international capital flows," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    5. David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2017. "Stochastic Impatience and the Separation of Time and Risk Preferences," PIER Working Paper Archive 20-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Jul 2020.
    6. Jean-Jacques Forneron & Liang Zhong, 2023. "Convexity Not Required: Estimation of Smooth Moment Condition Models," Papers 2304.14386, arXiv.org.
    7. Chien, YiLi & Lustig, Hanno & Naknoi, Kanda, 2020. "Why are exchange rates so smooth? A household finance explanation," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 129-144.
    8. Wenxin Du & Carolin E. Pflueger & Jesse Schreger, 2020. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy," Journal of Finance, American Finance Association, vol. 75(6), pages 3097-3138, December.
    9. Dragomirescu-Gaina, Catalin & Philippas, Dionisis, 2022. "Local versus global factors weighing on stock market returns during the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 46(PA).
    10. Maurer, Thomas & Tran, Ngoc-Khanh, 2021. "Entangled risks in incomplete FX markets," Journal of Financial Economics, Elsevier, vol. 142(1), pages 146-165.
    11. Mariano Croce & Mohammad R. Jahan-Parvar & Samuel Rosen, 2022. "SONOMA: a Small Open ecoNOmy for MAcrofinance," International Finance Discussion Papers 1349, Board of Governors of the Federal Reserve System (U.S.).
    12. Jamali, Ibrahim & Yamani, Ehab & Smallwood, Aaron D., 2023. "An investment-based explanation of currency excess returns," Journal of International Money and Finance, Elsevier, vol. 133(C).
    13. Wang, Wenhao & Xu, Tao & Liu, Xiaoyi & Sun, Yongkun, 2023. "FDI inflows and income inequality: A Schumpeterian economic growth," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 805-820.
    14. Jacek Rothert & Alexander McQuoid & Katherine Smith, 2022. "Foreign direct investment over the international business cycle," GRAPE Working Papers 76, GRAPE Group for Research in Applied Economics.
    15. Hassan, Ramin & Loualiche, Erik & Pecora, Alexandre R. & Ward, Colin, 2023. "International trade and the risk in bilateral exchange rates," Journal of Financial Economics, Elsevier, vol. 150(2).
    16. Fousseni Chabi-Yo & Riccardo Colacito, 2019. "The Term Structures of Coentropy in International Financial Markets," Management Science, INFORMS, vol. 65(8), pages 3541-3558, August.
    17. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    18. El-Shagi, Makram, 2023. "Productivity shocks and capital flows," Economics Letters, Elsevier, vol. 225(C).
    19. Tarek A. Hassan & Tony Zhang, 2021. "The Economics of Currency Risk," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 281-307, August.
    20. Bretscher, Lorenzo & Hsu, Alex & Tamoni, Andrea, 2020. "Fiscal policy driven bond risk premia," Journal of Financial Economics, Elsevier, vol. 138(1), pages 53-73.
    21. Jiang, Zhengyang & Richmond, Robert J., 2023. "Origins of international factor structures," Journal of Financial Economics, Elsevier, vol. 147(1), pages 1-26.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yang Liu & Mariano Croce & Ivan Shaliastovich & Ric Colacito, 2016. "Volatility Risk Pass-Through," 2016 Meeting Papers 135, Society for Economic Dynamics.
    2. Heathcote, Jonathan & Perri, Fabrizio, 2014. "Assessing International Efficiency," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 523-584, Elsevier.
    3. Robert Ready & Mariano Croce & Federico Gavazzoni & Riccardo Colacito, 2016. "Currency Risk Factors in a Recursive Multi-Country Economy," 2016 Meeting Papers 297, Society for Economic Dynamics.
    4. Dmitriev, Alexandre, 2017. "Composite habits and international transmission of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 1-34.
    5. Backus, David & Coleman, Chase & Ferriere, Axelle & Lyon, Spencer, 2016. "Pareto weights as wedges in two-country models," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 98-110.
    6. Grüning, Patrick, 2017. "International endogenous growth, macro anomalies, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 118-148.
    7. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    8. Alessandria, George & Choi, Horag, 2021. "The dynamics of the U.S. trade balance and real exchange rate: The J curve and trade costs?," Journal of International Economics, Elsevier, vol. 132(C).
    9. Hakon Tretvoll, 2018. "Real Exchange Variability in a Two-Country Business Cycle Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 123-145, January.
    10. Hakon Tretvoll, 2013. "Investment-Specific Technology Shocks and Recursive Preferences," 2013 Meeting Papers 1207, Society for Economic Dynamics.
    11. Tarek A. Hassan & Tony Zhang, 2021. "The Economics of Currency Risk," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 281-307, August.
    12. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
    13. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.
    14. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    15. Coeurdacier, Nicolas & Rey, Hélène & Winant, Pablo, 2020. "Financial integration and growth in a risky world," Journal of Monetary Economics, Elsevier, vol. 112(C), pages 1-21.
    16. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, vol. 83(1), pages 37-52, January.
    17. Rouillard, Jean-François, 2018. "International risk sharing and financial shocks," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 26-44.
    18. Hirata, Hideaki, 2014. "Preference shocks, international frictions, and international business cycles," Journal of Asian Economics, Elsevier, vol. 34(C), pages 92-104.
    19. Charles Engel & Jian Wang, 2007. "International trade in durable goods: understanding volatility, cyclicality, and elastics," Globalization Institute Working Papers 03, Federal Reserve Bank of Dallas.
    20. Gavazzoni, Federico & Santacreu, Ana Maria, 2020. "International R&D spillovers and asset prices," Journal of Financial Economics, Elsevier, vol. 136(2), pages 330-354.

    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12783. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.