Cryptocurrencies, Currency Competition, and the Impossible Trinity
46 Pages Posted: 7 Oct 2019
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Cryptocurrencies, Currency Competition and the Impossible Trinity
Cryptocurrencies, Currency Competition, and the Impossible Trinity
Cryptocurrencies, Currency Competition, and the Impossible Trinity
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: Suggested Citation
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Cryptocurrencies, Currency Competition, and the Impossible Trinity
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