Economics at your fingertips  

Deflationary policy under digital and fiat currency competition

Adib J. Rahman

Research in Economics, 2018, vol. 72, issue 2, 171-180

Abstract: I examine the implications of digital and fiat currency competition on optimal monetary policy according to the Friedman rule (a standard deflationary policy) in a Fernández-Villaverde and Sanches (2016) framework, with no search friction. Consistent with the existing literature, first, I find that monetary equilibrium under a purely private arrangement of digital currencies will not deliver a socially efficient allocation. Second, I place restrictions on the available supply of digital currencies and find that a socially efficient allocation is possible only if the upper bound on digital currency circulation is equal to the rate of time-preference, albeit some degree of government intervention is required to curb the profit-maximizing incentive of the miners. Third, I find that optimal monetary policy at the Friedman rule will be socially inefficient when digital currencies compete with government-issued fiat money. Finally, I show that the Friedman rule is a socially desirable policy only in a purely fiat monetary regime.

Keywords: Digital currency; Monetary policy; Friedman rule; Deflation (search for similar items in EconPapers)
JEL-codes: E42 E52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Research in Economics is currently edited by Federico Etro

More articles in Research in Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2018-08-04
Handle: RePEc:eee:reecon:v:72:y:2018:i:2:p:171-180