Working Paper: NBER ID: w22157
Authors: Jess Fernández-Villaverde; Daniel Sanches
Abstract: 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.
Keywords: Currency Competition; Private Money; Cryptocurrencies
JEL Codes: E40; E42; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Equilibrium with price stability exists in competing private monies (E42) | Private currencies maintain their value over time (E42) |
| A continuum of equilibrium trajectories exists (C62) | Private currencies' values converge to zero (E42) |
| Self-fulfilling inflationary episodes are possible (E31) | Inflationary pressures are not exclusive to government-issued money (E49) |
| Equilibrium with stable currencies Pareto dominates other equilibria (D53) | Market failures exist in the provision of money (E49) |
| Introducing government money leads to recovery of equilibrium allocations (E19) | Hybrid monetary system can promote stability (E42) |
| Introducing productive capital changes dynamics of currency value (F31) | Efficient allocations are possible under certain conditions (D61) |
| Presence of productive capital alters stability of private currencies (E42) | Links findings to broader economic theories regarding liquidity and capital utilization (E44) |