Can Currency Competition Work?

46 Pages Posted: 18 Apr 2016

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: April 2016

Abstract

Can competition among privately issued fiat currencies such as Bitcoin or Ethereum work? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies, but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital. We also investigate the properties of hybrid monetary arrangements with private and government monies, of automata issuing money, and the role of network effects.

Keywords: cryptocurrencies, currency competition, Monetary policy, Private money

JEL Classification: E40, E42, E52

Suggested Citation

Fernández-Villaverde, Jesús and Sanches, Daniel R., Can Currency Competition Work? (April 2016). CEPR Discussion Paper No. DP11095. Available at SSRN: https://ssrn.com/abstract=2766388

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Philadelphia, PA 19104
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National Bureau of Economic Research (NBER)

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Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
United States

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