DP13517 | Monetary Policy in a World of Cryptocurrencies

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02/10/2019

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Abstract

Can currency competition destabilize central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of cryptocurrency sets a lower bound on the nominal interest rate and the attainable inflation rate. In a world of multiple competing currencies issued by profit-maximizing agents, the central bank completely loses control of the nominal interest rate and the inflation rate, which are both determined by structural factors, and thus not subject to manipulation, a result welcomed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.