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|
|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.