Model examines monetary singleness amid digital money innovation

The paper develops a three-period banking model where banks choose both the unit of account for their debt and whether it can function as a medium of exchange.

This framework allows for analysis of how monetary singleness, defined as all forms of money trading at par and sharing a common unit of account, can be preserved or eroded.

The model suggests that small deviations from singleness, such as ATM withdrawal fees, can be consistent with efficient allocation.

However, the probability of inefficient equilibria rises significantly when new digital money forms are issued by private entities with business models distinct from incumbent financial institutions.

The study also highlights the crucial stabilising roles of both cash and central bank reserves.

Reserves ensure issuers share a consistent asset base, while cash provides an interoperability backstop through central bank money.

This coordination mechanism is essential for achieving monetary cohesion, even when convertibility is guaranteed and information is symmetric.

Rapid innovation in digital payments and the advent of privately issued digital money have reignited policy interest in monetary singleness.

This property, fundamental for seamless monetary exchange, faces challenges from new instruments with diverse technological and institutional foundations.

The academic literature is grappling with questions like the desirability of singleness, the tolerance for small deviations from par, and the mechanisms for its maintenance.

Some argue even minor deviations can undermine money's coordinating role, while others suggest modest departures might be a tolerable price for digital innovation.

The paper contributes by modelling private money issuers' incentives to deviate from a common unit of account and allowing for endogenous choices over interoperability, which are central to the efficiency of multi-money systems.