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. Furthermore, the variance of the nominal exchange rate distribution increases in currency risk.
Specialization involves producing a smaller set of goods and doing it more proficiently.
In doing so, agents reduce production costs but reduce the probability of being matched with an acceptable trading partner. We derive the individually optimal degree of specialization and examine how it s a ected by underlying fundamentals. It is shown that a matching externality exists which makes the individual choice of specialization socially inefficient. Introducing money will lead to more specialization relative to barter, and has ambiguous effects on welfare. Thus, surprisingly, introducing money may reduce welfare.