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Parallel Digital Currencies and Sticky Prices

Author

Listed:
  • Harald Uhlig
  • Taojun Xie

Abstract

The rise of digital currencies may result in domestic parallel currencies. Their exchange rate shocks present new challenges for monetary policy. We analyze these issues in a New Keynesian framework. Firms set prices in one of the currencies. A one-time appreciation of a parallel currency results in persistent redistributions toward the Dollar sector output and inflation. We calculate optimal monetary policy. When price stickiness is homogeneous, it is optimal to leave nominal interest rates unchanged. We compare optimal policy to three Taylor rules. Higher dollar price rigidity may lead to an increase rather than a decrease in the Dollar sector.

Suggested Citation

  • Harald Uhlig & Taojun Xie, 2026. "Parallel Digital Currencies and Sticky Prices," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(1), pages 336-383, January.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:1:p:336-83
    DOI: 10.1257/mac.20220220
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    2. Magin, Jana Anjali & Neyer, Ulrike & Stempel, Daniel, 2025. "Cash or Cache? Distributional and business cycle implications of CBDC holding limits," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 101(C).
    3. Harald Uhlig, 2024. "On Digital Currencies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 52(1), pages 1-14, March.
    4. Ikeda, Daisuke, 2025. "Digital money as a medium of exchange and monetary policy in open economies," Macroeconomic Dynamics, Cambridge University Press, vol. 29, pages 1-1, January.
    5. Eun Young Oh & Shuonan Zhang, 2022. "Informal economy and central bank digital currency," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1520-1539, October.
    6. Max Fuchs & Jochen Michaelis, 2022. "Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency," MAGKS Papers on Economics 202205, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    7. Fuchs Max & Michaelis Jochen, 2023. "Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 243(2), pages 153-167, April.
    8. Karau, Sören, 2023. "Central bank digital currency competition and the impossible trinity," Finance Research Letters, Elsevier, vol. 54(C).
    9. Pietro Cova & Alessandro Notarpietro & Patrizio Pagano & Massimiliano Pisani, 2026. "Monetary Policy in the Open Economy With Digital Currencies," International Finance, Wiley Blackwell, vol. 29(1), pages 79-91, April.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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