A Framework for Analyzing Monetary Policy in an Economy with E-Money

54 Pages Posted: 30 Jan 2019

See all articles by Yu Zhu

Yu Zhu

Government of Canada - Bank of Canada

Scott Hendry

Bank of Canada

Date Written: December 31, 2018

Abstract

This paper considers an economy where central-bank-issued fiat money competes with privately-issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) there may exist multiple equilibria; (3) when the economy approaches a cashless state, the central bank's optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved. Central-bank-issued e-money leads to a simple optimal policy that achieves the first best.

Keywords: Digital currencies; Monetary policy

JEL Classification: E, E5, E52

Suggested Citation

Zhu, Yu and Hendry, Scott, A Framework for Analyzing Monetary Policy in an Economy with E-Money (December 31, 2018). Available at SSRN: https://ssrn.com/abstract=3318915 or http://dx.doi.org/10.2139/ssrn.3318915

Yu Zhu (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Scott Hendry

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-7668 (Phone)

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