The impact of the expansion of cryptocurrencies (Bitcoin) on the amount of money demand and  seigniorage  via DSGE Model

Varshosaz, Behnaz; Ghaffari, Farhad; Hosseini, Seyed Shamseddin; Memarnejhad, Abbas

The impact of the expansion of cryptocurrencies (Bitcoin) on the amount of money demand and seigniorage via DSGE Model

Document Type : Original Article

Authors

¹ Ph.D. Student in Economics, Department of Economics Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran

² Associate Professor at Department of Economics Science and Research Branch, Islamic Azad University, Tehran, Iran

³ Assistant Professor at Department of Economics Allameh Tabatabaee University & Science and Research Branch, Islamic Azad University, Tehran, Iran

⁴ Assistant Professor at Department of Economics Science and Research Branch, Islamic Azad University, Tehran, Iran

Abstract

The mechanism of money creation and other inflationary measures of central banks, which often prefer the short-term interests of governments to the rationality and long-term stability required by the market, are among the most important reasons for the new monetary system architecture and the widespread acceptance of cryptocurrencies such as Bitcoin in the last decade. In this paper, we solve a DSGE model to investigate the impact of Bitcoin encryption on the money demand and seigniorage.
To do so, the data of seasonal time series 1989 to 2018 have been used. In the model designed in this study, it is assumed that due to the use of money cryptocurrencies, the government revenue from money printing decreases; This will lead the government to reconsider the price of the energy (especially the energy used to extract cryptocurrencies) and supply it at the price that maximizes its profits. In this study, the shock caused by the price and the volume of Bitcoin transactions is considered as an indicator for the demand of cryptocurrencies. Our main finding is that as the demand for cryptocurrencies increases, the demand for the formal money decreases, the inflation decreases, and consequently the seigniorage revenue decreases. The results also indicate that the shock to the cryptocurrency from the channel of changes in the energy prices will compensate part of the government revenues, although in the long run the welfare effects of this policy have been significant.

Keywords

References

Acosta, P. A., Lartey, E K.K., Mandelman, F. S. 2009. “Remittances and the Dutch disease”. Journal of International Economics. 79(1) .pp. 102-116.

AllegretJ.p. and M.T. Benkhodja. 2015. “External Shocks and Monetary Policy in a Small Open Oil Economy”. Journal of Policy Modeling. No. 37. pp. 652-667.

Annalaura, I., Prof.Nistico Salvatore and Prof.Reichlin Pietro. 2014. ”A Decentralized Monetary Policy: An Analysis of Bitcoin In A Cash-In-Advance Model”.Depatment of Economic and Finance Libera University (LUISS)

Antonopoulos, A. M. 2017. “Mastering Bitcoin: Programming the Open Blockchain”. O'Reilly Media, Inc.

Badev, A & ,.Chen, M. 2014.” Bitcoin:Technical Background and Data Analysis”. Washington D.C: Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board.

Berentsen,A. 2012.” Monetary Policy Implications of Digital Money” (originally Published in 1997).

Bisinelli, Silvio Rizzini , and DaunaMoratti. 2018.” Bitcoin and Virtual Currencies – The point of view of a lawyer”.

Brito, J., Shadab, H., & Castillo, A. 2014. Bitcoin Financiel Regulation: Securities, Derivatives, Prediction Markets And Gambling. pp. 144-22.

Central Bank of Iran. 2018. time series database and quarterly reports (In Persian)

Christiano, L.J., Eichenbaum, M. & Evans, C.E. 2005.” Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy”. Journal of Political Economy, 113(1).pp. 1-45.

Dabrowski, M., &Janikowski, L. 2018. “Virtual currencies and central banks monetary policy: challenges ahead”. Retrieved July, 27, 2018.

Dagher, J., Gottschalk, J., Portillo, R. 2012. “The Short-run Impact of Oil Windfalls in Low-income Countries: A DSGE Approach”, Journal of African Economies. 21 (3). pp. 343-372.

European Central Bank. 2015. “Virtual currency schemes–a further analysis”, European Central Bank.

European Central Bank. 2012, “Virtual Currency Schemes”. Technical Report, October.

FATF. 2015. “Guidance for a risk-based approach to virtual currencies”.

Fridman, M. 1959, “The Demand for Money, Some Theoretical and Empirical Result”, Journal of Political Economy, University of Chicago Press. vol. 67, pp. 185-191.

He, D., Habermeier, K. F., Leckow, R. B., Haksar, V., Almeida, Y., Kashima, M., &Yepes, C. V. 2016.” Virtual Currencies and Beyond: Initial Considerations (No. 16/3)”. International Monetary Fund.

Hodson, H. 2014. "My Bitcoin road trip: living on virtual money for a day." New Scientist 221(2955).pp. 22.

Lama, R., Medina, J. P. 2012. “Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease? International Journal of Central Banking”, International Journal of Central Banking. 8(1).pp. 5-46.

Loseva, Anna. 2016. “Bitcoin: A Regression Analysis of Cryptocurrency Influence on the Russian Economy”. Department of Economics Moscow State University.

Saradoni,C&Alessandro,V. 2002. “The ‘IT revolution’ and the monetary system: Electronic money and its effects”. Discussion Papers. 42.pp.1-37.

Walsh Carl. 2003. ” Monetary Theory and Policy”, MIT Press