Cryptocurrencies, Currency Competition, and the Impossible Trinity

44 Pages Posted: 22 Aug 2019

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Linda Schilling

Ecole Polytechnique- CREST

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: August 19, 2019

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. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. 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 (August 19, 2019). 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

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

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

Via Due Macelli, 73
Rome, 00187
Italy

Linda Schilling

Ecole Polytechnique- CREST ( email )

5 Avenue Henry Le Chatelier
Palaiseau, 91120
France

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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