Previous work by Dumas and Solnik (1993) has shown that a CAPM which incorporates foreign-exchange risk premia (a so-called 'international CAPM') is better capable empirically of explaining the structure of worldwide rates of return than does the classic CAPM. In the specification of that test,...

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...

Entry into a market seems to necessitate some investment into "marketing capital" (or distribution capital: advertising, dealerships etc ... ). This form of investment has the property that, if it is unused for some time, it quickly becomes worthless. When entry into a market requires marketing...

Transferring physical capital and transferring production and sales activities from one country to the other typically entails large adjustment costs. The model of this paper features two homogeneous stocks of physical capital located in two different countries separated by an 'ocean'. The two...

When several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly between them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors' portfolio...

The paper extends previous analysis of closed-economy inflation targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the different transmission channels for monetary policy. The paper compares targeting...

Previous analysis of the implementation of inflation targeting is extended to monetary policy responses to different shocks, consequences of model uncertainty, effects of interest rate smoothing and stabilization, a comparison with nominal GDP targeting, and implications of forward-looking...

Inflation targeting is shown to imply inflation forecast targeting: the central bank's inflation forecast becomes an explicit intermediate target. Inflation forecast targeting simplifies both implementation and monitoring of monetary policy. The weight on output stabilization determines how...

Price level targeting (without base drift) and inflation targeting (with base drift) are compared under commitment and discretion, with persistence in unemployment. Price level targeting is often said to imply more short-run inflation variability and thereby more employment variability than...

Monetary policy can achieve average inflation equal to a given inflation target and, at best, a good compromise between inflation variability and output-gap variability. Monetary policy cannot completely stabilize either inflation or the output gap. Increased credibility in the form of inflation...