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A New Economic Framework: A DSGE Model with Cryptocurrency

Asimakopoulos, Stylianos; Lorusso, Marco; Ravazzolo, Francesco
Working paper
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URI
http://hdl.handle.net/11250/2624020
Date
2019-10-12
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  • Centre for Applied Macro- and Petroleum economics (CAMP) [95]
Abstract
This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the economic repercussions of cryptocurrency. We assume that cryptocurrency offers an alternative currency option to government currency for households and we have an endogenous supply and demand for cryptocurrency. We estimate our model with Bayesian techniques using monthly data for the period 2013:M6-2019:M3. Our results indicate a substitution effect between the real balances of government currency and cryptocurrency in response to technology, preferences and monetary policy shocks. In addition, real balances of cryptocurrency exhibit a countercyclical reaction to these shocks. Moreover, we find that government currency demand shocks have larger effects on the economy than shocks to cryptocurrency demand. Our results also show that cryptocurrency productivity shocks have negative effects on output and on the exchange rate between government currency and cryptocurrency, with a more pronounced negative reaction to output if the central bank increases its weight to government currency growth. Overall, our results provide novel insights on the underlying mechanisms of cryptocurrency and spillover effects to the economy.
Publisher
BI Norwegian Business School
Series
CAMP Working Paper Series;07/2019

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