Currency Price, the Nominal Exchange Rate, and Security Prices in a Two Country Dynamic Monetary Equilibrium

Rodney L. White Center for Financial Research Working Paper Series 9-98

29 Pages Posted: 6 May 1998

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Date Written: 1998

Abstract

This paper examines a continuous-time two-country dynamic monetary equilibrium in which countries with possibly heterogeneous tastes and endowments hold their own money for the purpose of transaction services formulated via money in the utility function. Given a price system, no-arbitrage pricing results are provided for the price of each money and the nominal exchange rate. Characterizations are provided for equilibrium prices for general time-additive preferences and non-Markovian exogenous processes. Under a Markovian structure of model primitives, the currency prices are shown to solve a bivariate system of partial differential equations. Assuming that each country is endowed with heterogeneous separable power utility and the exogenous quantities all follow geometric Brownian motions, an equilibrium is shown to exist and additional characterization is provided. A further example of non-separable Cobb-Douglass preferences is investigated. The additional features over customary environment of homogeneous logarithmic preferences are emphasized.

JEL Classification: F31

Suggested Citation

Basak, Suleyman and Gallmeyer, Michael F., Currency Price, the Nominal Exchange Rate, and Security Prices in a Two Country Dynamic Monetary Equilibrium (1998). Rodney L. White Center for Financial Research Working Paper Series 9-98. Available at SSRN: https://ssrn.com/abstract=84008 or http://dx.doi.org/10.2139/ssrn.84008

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

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