Research / BFI Working PaperDec 23, 2020

Parallel Digital Currencies and Sticky Prices

Harald Uhlig, Taojun Xie

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.

 

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