Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy
AbstractWe analyze a dual currency search model in which agents are allowed to hold multiple units of both currencies. Hence, agents hold portfolios of currency. We 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 currency. The inflation tax is modeled by having government agents randomly confiscate the two currencies at different rates. We are able to obtain analytical results in a very special case but in general we must rely on numerical methods to solve for the steady-state distributions of currency portfolios, prices and value functions.
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Bibliographic InfoPaper provided by London School of Economics - Centre for Labour Economics in its series Papers with number 9916.
Length: 45 pages
Date of creation: 1999
Date of revision:
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EXCHANGE RATE ; CURRENCIES ; INTERNATIONAL FINANCIAL MARKET;
Other versions of this item:
- Ben Craig & Christopher J. Waller, 1999. "Currency portfolios and nominal exchange rates in a dual currency search economy," Working Paper 9916, Federal Reserve Bank of Cleveland.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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