Losing grip? The Quantity Theory of Money under Currency Competition

Jasmina Arifovic, Isabelle Salle and Linda Schilling

No 22073, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This study examines monetary policy under competition between a centrally managed currency (the “Dollar†) and a fixed-supply alternative (the “Peso†). Theory and laboratory evidence reveal two equilibrium types. In the pass-through equilibrium, Dollar inflation is high and trade effects are limited. In the substitution equilibrium, Dollar dominance rises and velocity falls, muting Dollar inflation while generating inflation spillovers to Peso despite its fixed supply. Which equilibrium prevails depends on self-fulfilling inflation beliefs, not policy alone, and Dollar trade shares reveal these beliefs. The central bank therefore faces a trade-off between Dollar dominance and inflation control.

Keywords: Currency competition; Cryptocurrencies; Quantity theory of money (search for similar items in EconPapers)
JEL-codes: C92 E4 E5 (search for similar items in EconPapers)
Date: 2026-10
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