MONETARY UNION: World Economy with Local Currencies 3

There is of course a complementary set of first order conditions from the perspective of a representative generation t agent on the foreign island. The foreign representative agent solves the following optimization problem:

Note too that in (4), the random variable в impacts directly on home consumption, in a manner symmetric with (3). As we shall see, the magnitude of 0 is an important factor in the gains to monetary union.

Market Clearing

In each period, there are five markets that must clear: the two goods markets, the two money markets and the exchange market. The goods markets open at the start of the period. Here old agents from both islands use their local currency to purchase the goods produced by young agents. Each national money market is the flip side of these transaction: young agents sell their goods to acquire the local currency held by the old. Finally, in the exchange market, currencies are exchanged as young agents optimally set their portfolios.
The left side of this condition is the per capita money holdings of home currency by foreigners. The right side is the value, in terms of home island units of account, of the foreign money holdings of home agents. This condition guarantees that the portfolio adjustment at the end of youth (after goods market exchange) balance so that the home currency given up by the home agents is exactly equal to the holdings of home currency by the foreign agents.

A final form of money market clearing is to check that the exogenous stocks of domestic and foreign currencies are held by someone after the close of the exchange markets. These two conditions are given by Electronic Payday Loans Online