Research / BFI Working Paper•Dec 12, 2021
Parallel Digital Currencies and Sticky Prices
Harald Uhlig, Taojun Xie
The rise of digital currencies may result in domestic parallel currencies. Their exchange rate shocks will present a new challenge for monetary policy. We analyze these issues in a New Keynesian framework, where rms can set prices in one of the available currencies. Price rigidity translates a one-time appreciation of a parallel currency into persistent redistribution towards the dollar sector output and inflation. The persistence lasts longer if the central bank targets “dollar”-sector inflation, rather than inflation across all currency sectors. An increase in dollar price rigidity may lead to a decrease rather than an increase of the non-dollar sector.