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Currency portfolios and nominal exchange rates in a dual currency search economy

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  • Ben Craig
  • Christopher J. Waller

Abstract

The 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 Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9916.

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Date of creation: 1999
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Handle: RePEc:fip:fedcwp:9916

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Keywords: Money ; Foreign exchange;

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References

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  1. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(3), pages 397-419, June.
  2. Soller, E.V. & Waller, C., 1997. "A Search Theoretic Model of Legal and Illegal Currency," Papers, Indiana - Center for Econometric Model Research 97-003, Indiana - Center for Econometric Model Research.
  3. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-42, November.
  4. Green, Edward J. & Zhou, Ruilin, 1998. "A Rudimentary Random-Matching Model with Divisible Money and Prices," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 252-271, August.
  5. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 118-41, February.
  6. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
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Cited by:
  1. Camera, Gabriele & Craig, Ben & Waller, Christopher J., 2004. "Currency competition in a fundamental model of money," Journal of International Economics, Elsevier, Elsevier, vol. 64(2), pages 521-544, December.
  2. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.
  3. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(7), pages 1555-1591, October.
  4. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  5. Sebastien Lotz & Guillaume Rocheteau, 2000. "Launching of a New Currency in a Simple Random Matching Model," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0720, Econometric Society.
  6. Flandreau, Marc & Jobst, Clemens, 2006. "The Empirics of International Currencies: Historical Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5529, C.E.P.R. Discussion Papers.

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