On exchange rates and efficiency*

This paper analyzes an exchange economy in which several assets serve as stores of value and where agents have completely heterogeneous preferences and endowments. It describes the set of perfect foresight equilibria in which all assets have positive prices. There are international policies with determinate exchange rates if the world economy satisfies a strong efficiency criterion. Also, the corresponding equilibrium allocations are in the core of the world economy for certain international policies. Hence, a system of fixed exchange rates can support efficient allocations to the extent that countries agree on a division of seigniorage in the creation of international reserves.