The Impact of Cryptocurrency as a Substitution for Government Currency on the Iranian Economy in a DSGE Model

One of the words that is heard in the present life is digital currency Digital currency is a component of a decentralized financial system to facilitate economic transactions through evicting intermediaries such as banks as much as possible. In the meantime cryptocurrency is a digital or virtual currency that is secured by cryptography and made nearly impossible to counterfeit or double-spend. In the early 1990s, some elite people intended to give more freedom to the people through the use of the Internet and reduce the power of governments. The main goal of these elites was to empower people to control money and information and to simply eliminate intermediaries such as banks. Templates based on time series equations are a new type of economic modelling that dates back to the early 1970s. Time series patterns include a wide range of economic patterns, the most important of which is the vector auto regression pattern. Time series equations can be extracted in two ways, including a method of inference from theory and then modelling according to the researcher and the relevant statistical tests to determine the accuracy of the model and the estimated parameters. This type of modelling faces several problems such as unstructured parameters, structural shock detection, and specification error. Due to the nature of partial equilibrium, they sometimes have difficulty understanding the economic conditions and erroneous predictions. The problems are due to the difference between the model and the economic theory. To solve these problems, dynamic stochastic general equilibrium (abbreviated as DSGE, or DGE, or sometimes SDGE) models were used. This kind of modelling is a macroeconomic method often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data as well as future forecasting purposes. The present study has used the DSGE method to estimate the model. In this model, it is assumed that households gain utility from consumption, government currency and cryptocurrency, and labor supply has inutility for those households. Therefore, they try to maximize its utility by using their budget constraint. Another part of this study is the entrepreneurial section (cryptocurrency miners), which assumes that there is a continuous chain of entrepreneurs denoted by n, and that each entrepreneur operates under conditions of perfect competition. The third part is the manufacturing firm, which assumes that firms are different in an exclusive competitive environment for the production of intermediate goods and have access to other intermediate goods of other firms to produce a final product under perfectly competitive market conditions. The last section is the central bank, which determines the monetary policies governing the society. In this study, it is assumed that the central bank uses the nominal interest rate as a rule set in a modified Taylor (1993) model. This model is estimated using the monthly data of Iran, and the results show that there is a strong substitution effect between the government currency real balance and the cryptocurrency real balance in response to technology, preferences and monetary policy shocks. In addition, government currency demand shocks have a greater impact on the economy than the cryptocurrency demand. Cryptocurrency productivity shocks also lead to a decline in the nominal exchange rate. Production and inflation decrease when nominal interest rates increase. However, the effects of these shocks are much less than those of traditional shocks. Overall, this study provides new insights and evidence on the underlying mechanisms of cryptocurrency and its effects on the economy. It can be a guide for investors, policymakers, central bankers and researchers as how to operate cryptocurrencies and the corresponding ecosystem in the future. In particular, two policy recommendations emerge from the analysis of this study. First, according to the results, it was shown that increasing the supply of cryptocurrencies has a negative effect on production. Thus, monetary authorities may decide to adjust the rates in response to the changes in the cryptocurrency real balance, which include the weight for cryptocurrency growth, as a policy response. Second, if the central bank is to prevent a decline in output, the nominal interest rate response to the changes in government currency growth must be gradual. Furthermore, there is a strong alternating effect between the real money balance and the real money code balance in response to technology, preferences and monetary policy shocks. As the important finding of the study, the increase in production and inflation is greater when cryptocurrency is not present in exchanges, indicating that more inflation exists when there is no cryptocurrency.