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Search-Theoretic Money, Capital and International Exchange Rate Fluctuations

Author

Listed:
  • Gomis-Porqueras, Pere
  • Kam, Timothy
  • Lee, Junsang

Abstract

In this paper we develop a two-country global monetary economy where a monetary equilibrium exists because of fundamentaldecentralized trade frictions ? a Lagos-Wright search and matching friction. In the decentralized markets (DM), the terms of trade can be determined either by bargaining or by competitive price taking (baseline model). We show that the baseline model is capable of generating quite realistic real and nominal exchange rate volatility observed in the data, without relying on more ad-hoc sticky price assumptions commonly used in the international macroeconomics literature. The key mechanism lies in the role of search and matching frictions and a primitive technological assumption ? that capital is also a complementary input to production in the DM. This creates an internal propagation mechanism by modifying asset-pricing relations and relative price dynamics in the model.

Suggested Citation

  • Gomis-Porqueras, Pere & Kam, Timothy & Lee, Junsang, 2010. "Search-Theoretic Money, Capital and International Exchange Rate Fluctuations," PIE/CIS Discussion Paper 477, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:piecis:477
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/18589/pie_dp477.pdf
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    Cited by:

    1. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.

    More about this item

    Keywords

    Search-theoretic Money; Open Economy; Real Exchange Rate Puzzle;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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