Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy

Ben Craig and Christopher Waller

Working Papers from London School of Economics - Centre for Labour Economics

Abstract: We analyze a dual currency search model in which agents are allowed to hold multiple units of both currencies. Hence, agents hold portfolios of currency. We 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 currency. The inflation tax is modeled by having government agents randomly confiscate the two currencies at different rates. We are able to obtain analytical results in a very special case but in general we must rely on numerical methods to solve for the steady-state distributions of currency portfolios, prices and value functions.

Keywords: EXCHANGE RATE; CURRENCIES; INTERNATIONAL FINANCIAL MARKET (search for similar items in EconPapers)
JEL-codes: F30 F31 G15 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1999
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Citations: View citations in EconPapers (5)

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Working Paper: Currency portfolios and nominal exchange rates in a dual currency search economy (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:lseple:9916

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