Losing Grip? The Quantity Theory of Money under Currency Competition

Jasmina Arifovic, Isabelle Salle and Linda Schilling

No 20529, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This study examines currency competition between a centrally managed currency, the Dollar, and a rigid-supply alternative, Bitcoin, focusing on the role of monetary policy. Using theoretical modeling and laboratory experiments, we show that proportional transfers, modeled as interest on Dollar balances, increase Dollar trade shares (Dollar dominance) and reduce Dollar velocities, thereby weakening the pass-through of monetary policy to prices. These dynamics are self-fulfilling: low inflation expectations drive trade shifts and slower spending, which in turn suppress Dollar prices. In the lab, we observe how evolving expectations shape trade, velocity, and inflation. Dollar policy induces inflation spillovers into Bitcoin by crowding out trade, despite Bitcoin’s lack of a monetary authority, revealing the limits of central bank influence in an increasingly pluralistic monetary system.

JEL-codes: C92 E4 E5 (search for similar items in EconPapers)
Date: 2025-08
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