Title: Optimal Home Currency and the Curved International Equilibrium

Author: Jussi Keppo

Status: Systems Analysis Laboratory Research Reports A71, February 1998.

Keywords: Equilibrium, Foreign exchange rate, Market price of risk, Optimization

In this paper we extend the choice of optimal portfolio and consumption to include also the selection of an optimal home currency for single agents in a segmented real international economy. We also derive an equilibrium that emerges if representative agents behave according to the optimization model. In this situation the market prices of risk do not reflect the risk attitudes of the investors in the particular currency, but are simply determined by the interplay of all investors in the international economy. This yields the curved international equilibrium.