Currency competition in a fundamental model of money
The authors study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The equilibrium value of the two currencies, their transaction velocities and agents' spending patterns are endogenously determined. The authors derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. They also examine when the reverse spending pattern is optimal.
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- Head, Allen & Shi, Shouyong, 2003.
"A fundamental theory of exchange rates and direct currency trades,"
Journal of Monetary Economics,
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