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A Framework for Analyzing Monetary Policy in an Economy with E-money

Yu Zhu and Scott Hendry ()

Staff Working Papers from Bank of Canada

Abstract: This paper considers an economy where central-bank-issued fiat money competes with privately issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) there may exist multiple equilibria; (3) when the economy approaches a cashless state, the central bank’s optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved. Central-bank-issued e-money leads to a simple optimal policy that achieves the first best.

Keywords: Digital Currencies; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2019-01
New Economics Papers: this item is included in nep-cba, nep-gth, nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-1

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