Bitcoin and the PPP Puzzle

5 Pages Posted: 3 Jul 2014

See all articles by Paolo Tasca

Paolo Tasca

UCL Centre for Blockchain Technologies

Calebe de Roure

Reserve Bank of Australia

Date Written: July 2, 2014

Abstract

This paper approaches the PPP puzzle by using the Bitcoin/US Dollar exchange rate. The use of the virtual currency as macroeconomic laboratory allows us to remove frictions that previously impeded the empirical demonstration of the law of one price. We show that price adjustments are still far from perfect due to information asymmetry between agents. Nevertheless, the real exchange rate is stationary and adjusts by 81% within one day. Finally, because of the different speed of information spread, good market arbitrage takes place in the Bitcoin economy but not in the US economy. Thus, we conclude that in a frictionless economy the PPP holds and the speed of arbitrage for the good market depends on the speed of information spread among agents.

Keywords: Bitcoin, Purchase Power Parity, Silk Road

JEL Classification: F31

Suggested Citation

Tasca, Paolo and de Roure, Calebe, Bitcoin and the PPP Puzzle (July 2, 2014). Available at SSRN: https://ssrn.com/abstract=2461588 or http://dx.doi.org/10.2139/ssrn.2461588

Paolo Tasca (Contact Author)

UCL Centre for Blockchain Technologies ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://paolotasca.com

Calebe De Roure

Reserve Bank of Australia

65, Martin Place
Sydney, NSW 2000
Australia

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