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On the Economics of Digital Currencies

Author

Listed:
  • Jesus Fernandez-Villaverde
  • Daniel R. Sanches

Abstract

Can a monetary system in which privately issued cryptocurrencies circulate as media of exchange work? Is such a system stable? How should governments react to digital currencies? Can these currencies and government-issued money coexist? Are cryptocurrencies consistent with an efficient allocation? These are some of the important questions that the sudden rise of cryptocurrencies has brought to contemporary policy discussions. To answer these questions, we construct a model of competition among privately issued .at currencies. We .nd that a purely private arrangement fails to implement an efficient allocation, even though it candeliver price stability under certain technological conditions. Currency comptition creates problems for monetary policy implementation under conventional methods. However, it is possible to design a policy rule that uniquely implements an efficient allocation by driving private currencies out of the market. We also show that unique implementation of an efficient allocation can be achieved without government intervention if productive capital is introduced.

Suggested Citation

  • Jesus Fernandez-Villaverde & Daniel R. Sanches, 2018. "On the Economics of Digital Currencies," Working Papers 18-7, Federal Reserve Bank of Philadelphia, revised 02 Feb 2018.
  • Handle: RePEc:fip:fedpwp:18-7
    DOI: https://doi.org/10.21799/frbp.wp.2018.07
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    File URL: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2018/wp18-07.pdf
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    Cited by:

    1. Mielberg, Egger L., 2018. "Digital Bank," OSF Preprints e2z5f, Center for Open Science.

    More about this item

    Keywords

    monetary policy; Currency competition; cryptocurrencies;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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