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On the Economics of Digital Currencies

Author

Listed:
  • Jesús Fernández-Villaverde
  • Daniel R. Sanches

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.

Suggested Citation

  • Jesús Fernández-Villaverde & Daniel R. Sanches, 2018. "On the Economics of Digital Currencies," Working Papers 18-7, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:18-7
    DOI: https://doi.org/10.21799/frbp.wp.2018.07
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    Citations

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    Cited by:

    1. Michael Peneder, 2022. "Digitization and the evolution of money as a social technology of account," Journal of Evolutionary Economics, Springer, vol. 32(1), pages 175-203, January.
    2. Paolo Fegatelli, 2019. "Central bank digital currencies: The case of universal central bank reserves," BCL working papers 130, Central Bank of Luxembourg.
    3. Andrada-Félix, Julián & Fernandez-Perez, Adrian & Sosvilla-Rivero, Simón, 2020. "Distant or close cousins: Connectedness between cryptocurrencies and traditional currencies volatilities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 67(C).
    4. Ángeles Cebrián-Hernández & Enrique Jiménez-Rodríguez, 2021. "Modeling of the Bitcoin Volatility through Key Financial Environment Variables: An Application of Conditional Correlation MGARCH Models," Mathematics, MDPI, vol. 9(3), pages 1-16, January.
    5. Mielberg, Egger L., 2018. "Digital Bank," OSF Preprints e2z5f, Center for Open Science.
    6. Arto Kovanen, 2019. "Competing With Bitcoin - Some Policy Considerations for Issuing Digitalized Legal Tenders," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(4), pages 1-16, July.

    More about this item

    Keywords

    Currency competition; cryptocurrencies; monetary policy;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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