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A Framework for Analyzing Monetary Policy in an Economy with E-money

Author

Listed:
  • Yu Zhu
  • Scott Hendry
Abstract
This paper considers an economy where central-bank-issued fiat money competes with privately issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) there may exist multiple equilibria; (3) when the economy approaches a cashless state, the central bank’s optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved. Central-bank-issued e-money leads to a simple optimal policy that achieves the first best.

Suggested Citation

  • Yu Zhu & Scott Hendry, 2019. "A Framework for Analyzing Monetary Policy in an Economy with E-money," Staff Working Papers 19-1, Bank of Canada.
  • Handle: RePEc:bca:bocawp:19-1
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    References listed on IDEAS

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    Cited by:

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    2. Chiu, Jonathan & Wong, Tsz-Nga, 2022. "Payments on digital platforms: Resiliency, interoperability and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    3. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    4. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta & Albert J. Menkveld, 2023. "Equilibrium Bitcoin Pricing," Journal of Finance, American Finance Association, vol. 78(2), pages 967-1014, April.
    5. Bajaj, Ayushi & Damodaran, Nikhil, 2022. "Consumer payment choice and the heterogeneous impact of India’s demonetization," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    6. Williamson, Stephen D., 2022. "Central bank digital currency and flight to safety," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    7. Davoodalhosseini, Seyed Mohammadreza, 2022. "Central bank digital currency and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    8. Janet Hua & Yu Zhu, 2021. "Monetary Policy Pass-Through with Central Bank Digital Currency," Staff Working Papers 21-10, Bank of Canada.
    9. Beniak, Patrycja, 2019. "Central bank digital currency and monetary policy: a literature review," MPRA Paper 96663, University Library of Munich, Germany.
    10. James Chapman & Carolyn A. Wilkins, 2019. "Crypto ‘Money’: Perspective of a Couple of Canadian Central Bankers," Discussion Papers 2019-1, Bank of Canada.
    11. Giancarlo Giudici & Alistair Milne & Dmitri Vinogradov, 2020. "Cryptocurrencies: market analysis and perspectives," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(1), pages 1-18, March.
    12. Stephen Williamson, 2022. "Central Bank Digital Currency: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 130(11), pages 2829-2861.
    13. Jonathan Chiu & Mohammad Davoodalhosseini, 2021. "Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design," Staff Working Papers 21-63, Bank of Canada.
    14. Isaiah Hull & Or Sattath, 2021. "Revisiting the Properties of Money," Papers 2111.04483, arXiv.org, revised Nov 2021.
    15. Daisuke Ikeda, 2022. "Digital Money as a Medium of Exchange and Monetary Policy in Open Economies," IMES Discussion Paper Series 22-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    16. Li, Jiaqi, 2023. "Predicting the demand for central bank digital currency: A structural analysis with survey data," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 73-85.

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    More about this item

    Keywords

    Digital Currencies; Monetary Policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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