DP15619 Parallel Digital Currencies and Sticky Prices

Author(s): Harald Uhlig, Taojun Xie
Publication Date: December 2020
Keyword(s): currency choice, digital currency, monetary policy, New Keynesian Model, sticky prices
JEL(s): E30, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15619

The recent rise of digital currencies opens the door to their use in parallel alongside official currencies (``dollar'') for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.