Cryptocurrencies, Currency Competition, and the Impossible Trinity

64 Pages Posted: 22 Aug 2019 Last revised: 22 Feb 2022

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

University of Bern - Department of Economics; Einaudi Institute for Economics and Finance (EIEF)

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: February 21, 2022

Abstract

We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk-adjusted martingale. Deviation from interest rate equality implies the risk of approaching the zero lower bound or the abandonment of the national currency. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.

Keywords: currency competition, cryptocurrency, impossible trinity, exchange rates, uncovered interest parity, independent monetary policy

JEL Classification: E4, F31, D53, G12

Suggested Citation

Benigno, Pierpaolo and Schilling, Linda and Uhlig, Harald, Cryptocurrencies, Currency Competition, and the Impossible Trinity (February 21, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-108, Available at SSRN: https://ssrn.com/abstract=3440288 or http://dx.doi.org/10.2139/ssrn.3440288

Pierpaolo Benigno

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School ( email )

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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