Virtual Currencies, the Money Market, and Monetary Policy

Article

Abstract

Virtual currencies are in vogue mainly due to two factors. First, as a protest against authority-driven monetary policy decisions and second, as alternatives to deficits in some monetary systems arising out of political instability or other causes. Assuming that virtual currencies indeed (partially) replace national currencies as payment vehicles, we attempt, in this article, to integrate the virtual currency supply and demand into the Keynesian money market framework. This article presents a few results for the central banks and outlines problems that may result for monetary policy formulation. Since this is the first such attempt to model a national money market as a combination of nationally-issued currency and globally-issued virtual currency, certain simplistic assumptions have been made. Nevertheless, the model offers directions on the impact of virtual currencies on the monetary system and the national money market. Additionally, the paper integrates the official standpoints of the European Central Bank and the Bank of England on this topic.

Keywords

Bitcoin cryptocurrency digital currency monetary policy monetary system payment system virtual system 

JEL

E41 E42 E51 E52 E58 

Notes

Acknowledgments

The author would like to thank the discussant of the paper draft, Kevin McIntyre, in the session “Monetary Policy” of the 78th International Atlantic Economic Conference 2014, Savannah, GA, USA, and other conference participants for very helpful comments. Also many thanks to an anonymous reviewer.

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Copyright information

© International Atlantic Economic Society 2016

Authors and Affiliations

  1. 1.Faculty WOW, Department of Economics and Law of the Global EconomyBundeswehr University MunichNeubibergGermany

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