DP13517 Monetary Policy in a World of Cryptocurrencies

Author(s): Pierpaolo Benigno
Publication Date: February 2019
Keyword(s):
JEL(s):
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13517

Can currency competition destabilize central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of cryptocurrency sets a lower bound on the nominal interest rate and the attainable inflation rate. In a world of multiple competing currencies issued by profit-maximizing agents, the central bank completely loses control of the nominal interest rate and the inflation rate, which are both determined by structural factors, and thus not subject to manipulation, a result welcomed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.