Arbeitspapier

Currency Portfolios and Currency Exchange in a Search Economy

We develop a dual currency search model to study equilibrium currency exchange and the determination of nominal exchange rates. Agents hold portfolios consisting of two distinct currencies. We study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to their relative purchasing power risk. We use numerical methods to solve for the steady-state distributions of currency portfolios, nominal exchange rates and value functions. When one of the currencies is 'risky', equilibria exist in which the safe currency trades for multiple units of the risky currency with the observed ratio being the nominal exchange rate. However, due to the decentralized trading environment, we obtain a steady state distribution of nominal exchange rates. The mean and variance of the nominal exchange rate distribution are based on the fundamentals of the model and change in predictable ways when the fundamentals change.

Language
Englisch

Bibliographic citation
Series: Discussion Paper Series 1 ; No. 2001,15

Classification
Wirtschaft
Subject
Währungswettbewerb
Suchtheorie
Inflationssteuer
Portfolio-Management
Risikoaversion
Theorie

Event
Geistige Schöpfung
(who)
Waller, Christopher Jude
Craig, Ben R.
Event
Veröffentlichung
(who)
Deutsche Bundesbank
(where)
Frankfurt a. M.
(when)
2001

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Waller, Christopher Jude
  • Craig, Ben R.
  • Deutsche Bundesbank

Time of origin

  • 2001

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