Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy
Ben R. Craig
Federal Reserve Bank of Cleveland
Christopher J. Waller
University of Notre Dame - Department of Economics
FRB of Cleveland, Research Department Working Paper No. 9916
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.
JEL Classification: F30, F41, G15
Date posted: April 23, 2000
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