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On the Economics of Digital Currencies

Jesus Fernandez-Villaverde and Daniel Sanches

No 18-7, Working Papers from Federal Reserve Bank of Philadelphia

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.

Keywords: Currency competition; cryptocurrencies; monetary policy (search for similar items in EconPapers)
JEL-codes: E40 E42 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-02-02
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (8)

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DOI: 10.21799/frbp.wp.2018.07

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