Discrimination among alternative models of international capital markets

Most empirical capital flow studies have estimated individual models, many by assuming exogenous interest rates. None of these studies has examined interest rate interdependence from the perspective of the models. In this study, a simultaneous equation model of capital flows containing previous models as special cases is estimated using the cross spectral technique of model discrimination. Based on examination of both the flow-differential link and interest rate interdependence resulting from capital flows, the evidence 1) supports a simultaneous equation stock adjustment model, and 2) suggests that interest rate endogeneity may not imply serious simultaneous equation bias for those previous studies which assume exogenous interest rates.