Currency Exchange in a Random Search Model

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Abstract

This paper investigates foreign exchange trading, a phenomenon that typically accompanies international trade. A search-theoretic general equilibrium approach is adopted to study a two-country, two-currency model. For some parameter values of the model, there exist some pure-strategy equilibria in which commodity-currency trade is conducted primarily through local currency and in which there is active currency-currency exchange. The coexistence of valued foreign currency and its local non-acceptability conforms largely with the country-specific cash-in-advance constraint that is often assumed exogenously in international finance literature.

Original languageEnglish (US)
Pages (from-to)289-310
Number of pages22
JournalReview of Economic Studies
Volume64
Issue number2
DOIs
StatePublished - Jan 1 1997

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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