Ruilin Zhou

Currency Exchange in a Random Search Model

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.

Dynamic Monetary Equilibrium in a Random Matching Economy

This article concerns an infinite horizon economy where trade must occur pairwise, using a double auction mechanism, and where fiat money overcomes lack of double coincidence of wants. Traders are anonymous and lack market power. Goods are divisible and perishable, and are consumed at every date. Preferences are defined by utility-stream overtaking. Money is divisible and not subject to inventory constraints. The evolution of individual and economywide money holdings distributions is characterized. There is a welfare-ordered continuum of single price equilibria, reflecting indeterminacy of the price level rather than of relative prices.

Money as a Mechanism in a Bewley Economy

We study what features an economic environment might possess, such that it would be Pareto efficient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money. We prove a conjecture that is essentially due to Bewley [1980, 1983]. Monetary spot trading is nearly efficient when there is only a single perishable good (or a composite commodity) at each date and state of the world; random shocks are idiosyncratic, privately observed, and temporary; markets are competitive; and the agents are very patient. This result is a fairly close analogue, for trade using outside, fiat money, of a recent characterization by Levine and Zame [2002] of environments in which spot trade using inside money, in the form of one-period debt payable in a commodity, is nearly Pareto efficient. We also study a example where expansionary monetary mechanism Pareto dominates laissez-faire or contractionary monetary mechanism in an environment with impatient agents.

Import price adjustments with staggered import contracts

Abstract In this paper we develop a linear rational expectations equilibrium model of staggered import contracts with incomplete exchange rate indexing to explain the slow and moderate adjustment of import prices and quantities to exchange rate changes. The existence and stability of the equilibrium are proved by establishing equivalence between the solution to the equilibrium problem and the solution of an optimal linear regulator problem. Simulation analysis illustrates that the nature of the adjustment of import prices and quantities to exchange rate changes depends crucially on the length of the contract and the length of the delivery lag. Thus, an alternative to the ‘hysteresis’ explanation of the slow and moderate adjustment of import prices and quantities to exchange rate changes is established. The new explanation, however, has significantly different implications for exchange rate management and trade policies.