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

59 Pages Posted: 10 Jul 2007 Last revised: 27 Aug 2022

See all articles by Bernard Dumas

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 1993

Abstract

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.

Suggested Citation

Dumas, Bernard, Partial- vs. General-Equilibrium Models of the International Capital Market (September 1993). NBER Working Paper No. w4446, Available at SSRN: https://ssrn.com/abstract=480245

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