Research / BFI Working PaperDec 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.

 

More Research From These Scholars

BFI Working Paper Jul 1, 2011

Economics and Reality

Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Aug 1, 2009

How Far are We from the Slippery Slope? The Laffer Curve Revisited

Mathias Trabandt
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper May 8, 2018

The Dynamics of Sovereign Debt Crises and Bailouts

Francisco Roch, Harald Uhlig
Topics:  Fiscal Studies, Monetary Policy