Can currency competition work?

By Jesús Fernández-Villaverde, Daniel R. Sanches. Journal of Monetary Economics, 2016

156 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8a591a7441852aecebc806073d82e34cb202f6fe

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Citations in the corpus

The Economics of Cryptocurrencies—Bitcoin and Beyond (2017, unknown): “Finally, it is feasible for miners to use their existing mining capacities to mine different cryptocurrencies.”
Should Central Banks Issue Digital Currency? (2019, background): “Demand is increasing in the return offered by deposits and becomes vertical when the return equals 1 The two downward-sloping curves represent the supply of deposits from equation (12) for two different distribution functions  The dashed (blue) supply curve corresponds to the dashed (blue) dist”
Some simple bitcoin economics (2019, background): “Fernández-Villaverde and Sanches (2016) examine the scope of currency competition in an extended Lagos-Wright model and argue that there can be equilibria with price stability as well as a continuum of equilibrium trajectories with the property that the value of private currencies monotonically…”
Cryptocurrency market contagion: Market uncertainty, market complexity, and dynamic portfolios (2019, background): “Besides, monetary policy considerations and implications in the light of the upsurge of cryptocurrency markets have also been investigated by authors such as Fernández-Villaverde and Sanches (2016); Bordo and Levin (2017), as well as, Schilling and Uhlig (2018).”
Central Bank Digital Currency: When Price and Bank Stability Collide (2020, unknown): “, 2019), and the macroeconomic implications of cryptocurrencies via currency competition (Benigno, 2019; Benigno et al., 2019; Fernández-Villaverde and Sanches, 2019; Schilling and Uhlig, 2019).”