nginx proxy configuration

I currently user nginx with passenger to serve my rails app.

I am considering including a reverse proxy for caching (static contents as well as etagged actions).

1 - Can I use this same nginx instance for this purpose? If yes, is this the way to go or do I need a different instance (a new node or another nginx instance running on the same node)?

2 - Is it better to use something like squid/varnish?

Thanks!