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

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 nomial exchange rate. Characterizations are provided for equilibrium prices for general time-additive preferences and non-Markovian exogenous processes.