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Fixed and Flexible Exchange-rates in Two Matching Models: Non-equivalence Results

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  • Zhu, Tao
  • Wallace, Neil

Abstract

There is a presumption that fixed and flexible (floating or market-determined) exchange-rate systems are equivalent if prices are flexible. We show that the presumption does not hold in two matching models of money. In both models, (i) currencies are the only assets and all trade is spot trade; (ii) the trades that directly determine welfare occur in pairwise meetings between buyers and sellers; and (iii) imperfect substitutability (including, as a special case, no substitutability) among currencies is a consequence of the trading protocol in those meetings. The two models are variants of the Lagos-Wright (2005) model and differ regarding the timing of the shock realizations relative to the centralized trade opportunities. One version has a speculative fringe. In it, the unique stationary (monetary) equilibrium under the fixed exchange-rate regime is one of a continuum of equilibria under a flexible exchange-rate regime. The other version has no speculative fringe. In it, there is a unique (monetary) stationary equilibrium under each exchange-rate regime and they differ.

Suggested Citation

  • Zhu, Tao & Wallace, Neil, 2020. "Fixed and Flexible Exchange-rates in Two Matching Models: Non-equivalence Results," MPRA Paper 102913, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102913
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    File URL: https://mpra.ub.uni-muenchen.de/102913/1/MPRA_paper_102913.pdf
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    References listed on IDEAS

    as
    1. Tai-wei Hu & John Kennan & Neil Wallace, 2009. "Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 116-137, February.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
    4. Zhu, Tao, 2005. "Existence of a monetary steady state in a matching model: divisible money," Journal of Economic Theory, Elsevier, vol. 123(2), pages 135-160, August.
    5. 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.
    6. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 207-222.
    7. Zhu, Tao & Wallace, Neil, 2007. "Pairwise trade and coexistence of money and higher-return assets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 524-535, March.
    8. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2520-2560.
    9. Araujo, Luis & Hu, Tai-Wei, 2018. "Optimal monetary interventions in credit markets," Journal of Economic Theory, Elsevier, vol. 178(C), pages 455-487.
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    Cited by:

    1. Zhixiu Yu, 2023. "On the Coexistence of Cryptocurrency and Fiat Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 147-180, July.

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    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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