NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Bernard Dumas

NBER Working Paper No. 4446
Issued in September 1993
NBER Program(s):   AP   IFM

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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Document Object Identifier (DOI): 10.3386/w4446

Published: R. van der Ploeg, ed., Handbook of International Macroeconomics,(Basil Blackwell Publishers), 1994.

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