Kiel Working Papers, Kiel Institute for World Economics
No 1131:
Consumer Preferences and the Reliability of Euler Equation Tests of Capital Mobility ; Some Simulation-Based Evidence
Claudia M. Buch, Joerg Doepke and Christian Pierdzioch
Abstract: The globalization of international financial markets has
renewed interest in the measurement of capital mobility. Consumption-based
tests such as the Euler equation test are commonly used. These tests,
however, are derived under restrictive assumptions on consumer behavior. In
this paper, we ask how the Euler equation test of capital mobility performs
if these restrictive assumptions are relaxed. We simulate a dynamic general
equilibrium two-country model under alternative assumptions regarding
consumer preferences and use the simulated time series to test for the
degree of capital mobility. We find that the Euler equation test
discriminates fairly well between high and low capital mobility regimes
even if the restrictive assumptions on consumer behavior used to derive the
test are not satisfied.
Keywords: international capital mobility; Euler equation tests; consumption smoothing; new open economy macro models; (follow links to similar papers)
JEL-Codes: F36; F41; F47; E32; G15; (follow links to similar papers)
33 pages, October 2002
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