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.