Working Paper: CEPR ID: DP13517
Authors: Pierpaolo Benigno
Abstract: Can currency competition affect central banks' control of interest rates and prices? Yes, it can. In a two-currency world with competing cash (material or digital), the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In any case, the government has full control of the inflation rate. With an interest-bearing digital currency, equilibria in which government currency loses medium-of-exchange property are ruled out. This benefit comes at the cost of relinquishing control over the inflation rate.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth rate of cryptocurrency (E42) | government monetary policy effectiveness (E63) |
| issuing an interest-bearing digital currency (E42) | control over inflation rate (E64) |
| currency competition (F31) | central banks' control over interest rates and prices (E58) |
| growth rate of cryptocurrency (E42) | upper bound on nominal interest rate (E43) |
| growth rate of cryptocurrency (E42) | upper bound on attainable inflation rate (E31) |