Virtual Currencies, the Money Market, and Monetary Policy

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.