Bitcoin and Cagan's Model of Hyperinflation
16 Pages Posted: 6 Mar 2018 Last revised: 10 Mar 2018
Date Written: March 7, 2018
The drivers of Bitcoin's price fluctuations are studied within a framework based on Cagan's model of hyperinflation. In the model, the price of Bitcoin is driven by stochastic adoption and payments technology, as well as endogenous expectations of future values. The model is estimated with bitcoin prices, transaction volumes, and money supply data. A majority of price fluctuations can be attributed to stochastic adoption, shocks to the payments technology are less important. The money demand elasticity is estimated to be larger than for fiat currencies during episodes of hyperinflation.
Keywords: Bitcoin, money demand, exchange rates
JEL Classification: E31, E41, F31, G12
Suggested Citation: Suggested Citation