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Diversified Currency Holdings and Exchange Rate Dynamics

Author

Listed:
  • Chung-Fu Lai

    (Department of Applied Economics, Fo Guang University, Yilan County, Taiwan)

  • Shan-Kai Tsa

    (Department of Applied Economics, Fo Guang University, Yilan County, Taiwan)

Abstract

In this study, we incorporate diversified currency holdings into the New Open Economy Macroeconomics (NOEM) model to explore the issue of exchange rates dynamics. The findings show that exchange rate overshooting occurs when diversified currency holdings are included in a two-country dynamic optimizing NOEM model, and the extent of the overshoot depends on the level of diversified currency holdings. Regarding welfare analysis, an expansionary monetary policy of the home country increases domestic welfare. Also, we find that current account plays an important role in the effect of monetary policy on exchange rates, the increase in the domestic money supply stimulates domestic consumption expenditure through the effects of current account improvements, resulting in exchange rate appreciation.

Suggested Citation

  • Chung-Fu Lai & Shan-Kai Tsa, 2015. "Diversified Currency Holdings and Exchange Rate Dynamics," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 678-689.
  • Handle: RePEc:eco:journ1:2015-03-07
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    References listed on IDEAS

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    More about this item

    Keywords

    Diversified Currency Holdings; Exchange Rate Dynamics; Micro-foundations;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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