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Can currency competition work?

Author

Listed:
  • Jesús Fernández-Villaverde
  • Daniel R. Sanches

Abstract

Can competition work among privately issued fiat currencies such as Bitcoin or Ethereum? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital. We also investigate the properties of hybrid monetary arrangements with private and government monies, of automata issuing money, and the role of network effects.

Suggested Citation

  • Jesús Fernández-Villaverde & Daniel R. Sanches, 2016. "Can currency competition work?," Working Papers 16-12, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:16-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Private money; Currency competition; Cryptocurrencies; Monetary policy;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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