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Currency Prices, the Nominal Exchange Rate, and Security Prices in a Two-Country Dynamic Monetary Equilibrium

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  • Süleyman Basak
  • Mike Gallmeyer

Abstract

This paper examines a continuous-time two country dynamic monetary equilibrium in which countries with possible heterogeneous tastes and endowments hold their own money for the purpose of transaction services formulated via the money in the utility function. Given a price system, no-arbitrage pricing results are provided for the price of each money and the nominal exchange rate. Characterizations are provided for equilibrium prices for general time-additive preferences and non-Markovian exogenous processes.
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Suggested Citation

  • Süleyman Basak & Mike Gallmeyer, "undated". "Currency Prices, the Nominal Exchange Rate, and Security Prices in a Two-Country Dynamic Monetary Equilibrium," Rodney L. White Center for Financial Research Working Papers 09-98, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:09-98
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    References listed on IDEAS

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    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    2. Stulz, Rene M, 1986. " Asset Pricing and Expected Inflation," Journal of Finance, American Finance Association, vol. 41(1), pages 209-223, March.
    3. Ohashi, Kazuhiko, 1991. "A note on the terminal date security prices in a continuous time trading model with dividends," Journal of Mathematical Economics, Elsevier, vol. 20(2), pages 219-223.
    4. Stulz, Rene M, 1984. "Currency Preferences, Purchasing Power Risks, and the Determination of Exchange Rates in an Optimizing Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(3), pages 302-316, August.
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
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    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    8. Svensson, Lars E. O., 1985. "Currency prices, terms of trade, and interest rates: A general equilibrium asset-pricing cash-in-advance approach," Journal of International Economics, Elsevier, vol. 18(1-2), pages 17-41, February.
    9. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
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    11. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-984, June.
    12. LeRoy, Stephen F, 1984. "Nominal Prices and Interest Rates in General Equilibrium: Money Shocks," The Journal of Business, University of Chicago Press, vol. 57(2), pages 177-195, April.
    13. Huang, Chi-fu, 1987. "An Intertemporal General Equilibrium Asset Pricing Model: The Case of Diffusion Information," Econometrica, Econometric Society, vol. 55(1), pages 117-142, January.
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    15. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    16. Stulz, Rene M, 1987. "An Equilibrium Model of Exchange Rate Determination and Asset Pricing with Nontraded Goods and Imperfect Information," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1024-1040, October.
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    18. Zapatero, Fernando, 1995. "Equilibrium asset prices and exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 787-811, May.
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    21. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
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    Citations

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    Cited by:

    1. Anna Pavlova & Roberto Rigobon, 2010. "International Macro-Finance," NBER Working Papers 16630, National Bureau of Economic Research, Inc.
    2. Phornchanok Cumperayot, 2003. "Dusting off the Perception of Risk and Returns in FOREX Markets," CESifo Working Paper Series 904, CESifo Group Munich.
    3. repec:ebl:ecbull:v:7:y:2003:i:4:p:1-11 is not listed on IDEAS
    4. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    5. Basak, Suleyman, 2005. "Asset pricing with heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2849-2881, November.
    6. Suleyman Basak & Hongjun Yan, 2010. "Equilibrium Asset Prices and Investor Behaviour in the Presence of Money Illusion," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 914-936.
    7. Chiarolla, Maria B. & Haussmann, Ulrich G., 2001. "Equilibrium in a stochastic model with consumption, wages and investment," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 311-346, April.
    8. Travis D. Nesmith, 2005. "Solving stochastic money-in-the-utility-function models," Finance and Economics Discussion Series 2005-52, Board of Governors of the Federal Reserve System (U.S.).
    9. Basak, Suleyman, 2004. "Asset Prices with Heterogenous Beliefs," CEPR Discussion Papers 4256, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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