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Currency portfolios and nominal exchange rates in a dual currency search economy

Ben Craig () and Christopher Waller ()

No 9916, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The authors analyze a dual-currency search model in which agents may hold multiple units of both currencies. They study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of the \\"inflation tax\\" risk associated with each. When one currency has the right amount of risk, equilibria exist in which the safe currency trades for multiple units of the risky one (pure currency exchange). As a result, the steady state has a distribution of nominal exchange rates. The mean and variance of this distribution typically change in predictable ways when the fundamentals change.

Keywords: Foreign exchange; Money (search for similar items in EconPapers)
Date: 1999, Revised 1999
New Economics Papers: this item is included in nep-ifn and nep-mon
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Working Paper: Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy (1999)
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