Cryptocurrencies, Currency Competition, and the Impossible Trinity

63 Pages Posted: 3 Sep 2019 Last revised: 18 Aug 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: August 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. 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.

Suggested Citation

Benigno, Pierpaolo and Schilling, Linda and Uhlig, Harald, Cryptocurrencies, Currency Competition, and the Impossible Trinity (August 2019). NBER Working Paper No. w26214, Available at SSRN: https://ssrn.com/abstract=3446524

Pierpaolo Benigno (Contact Author)

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

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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