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Partial- Vs. General-Equilibrium Models of the International Capital Market

  • Bernard Dumas
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    In this essay, I discuss and compare two ways of modeling international capital market equilibrium: the orthodox, general-equilibrium approach and the heterodox, partial-equilibrium CAPM (Capital Asset Pricing Model) approach. The benchmark for this comparison is the model's ability to provide an explanation for, or take into account, a number of stylized facts of international finance: UIRP deviations, home-equity preference, PPP deviations and their persistence, consumption behavior in relation to wealth. In addition, I ask which approach is more likely in future research to help us identify the relevant state variables of the economy. None of the models satisfactorily explains the stylized facts but the CAPM approach affords the most productive avenue for empirical research in the immediate future.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4446.

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    Date of creation: Sep 1993
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    Publication status: published as R. van der Ploeg, ed., Handbook of International Macroeconomics,(Basil Blackwell Publishers), 1994.
    Handle: RePEc:nbr:nberwo:4446
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