Diversified Currency Holdings and Exchange Rate Dynamics

Chung-Fu Lai and Shan-Kai Tsa
Additional contact information
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

International Journal of Economics and Financial Issues, 2015, vol. 5, issue 3, 678-689

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.

Keywords: Diversified Currency Holdings; Exchange Rate Dynamics; Micro-foundations (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.econjournals.com/index.php/ijefi/article/download/1260/pdf (application/pdf)
http://www.econjournals.com/index.php/ijefi/article/view/1260/pdf (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2015-03-07

Access Statistics for this article

International Journal of Economics and Financial Issues is currently edited by Ilhan Ozturk

More articles in International Journal of Economics and Financial Issues from Econjournals
Bibliographic data for series maintained by Ilhan Ozturk ().