Currency portfolios and nominal exchange rates in a dual currency search economy
AbstractThe authors analyze a dual-currency search model in which agents may hold multiple units of both currencies. They study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of the "inflation tax" risk associated with each. When one currency has the right amount of risk, equilibria exist in which the safe currency trades for multiple units of the risky one (pure currency exchange). As a result, the steady state has a distribution of nominal exchange rates. The mean and variance of this distribution typically change in predictable ways when the fundamentals change.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9916.
Date of creation: 1999
Date of revision:
Other versions of this item:
- Craig, B. & Waller, C.J., 1999. "Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy," Papers 9916, London School of Economics - Centre for Labour Economics.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-31 (All new papers)
- NEP-IFN-2000-01-31 (International Finance)
- NEP-MON-2000-01-31 (Monetary Economics)
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