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Title:Consumer preferences and the reliability of Euler equation tests of capital mobility : some simulation-based evidence PDF Logo
Authors:Pierdzioch, Christian
Doepke, Joerg
Buch, Claudia M.
Issue Date:2002
Series/Report no.:Kieler Arbeitspapiere 1131
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.
Subjects:international capital mobility
Euler equation tests
consumption smoothing
new open economy macro models
JEL:F36
F41
F47
E32
G15
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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