Cryptocurrencies, Currency Competition, and the Impossible Trinity

46 Pages Posted: 7 Oct 2019

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

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

Linda Marlene Schilling

University of Paris-Saclay - Ecole Polytechnique

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. 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: cryptocurrency, currency competition, Exchange Rates, impossible trinity, independent monetary policy, uncovered interest parity

JEL Classification: D53, E4, F31, G12

Suggested Citation

Benigno, Pierpaolo and Schilling, Linda Marlene and Uhlig, Harald, Cryptocurrencies, Currency Competition, and the Impossible Trinity (August 2019). CEPR Discussion Paper No. DP13943. Available at SSRN: https://ssrn.com/abstract=3464466

Pierpaolo Benigno (Contact Author)

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 Marlene Schilling

University of Paris-Saclay - Ecole Polytechnique ( email )

55 Avenue de Paris
Versailles, 78000
France

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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