Cryptocurrencies, Currency Competition, and The Impossible Trinity

Pierpaolo Benigno, Linda Schilling and Harald Uhlig ()

No 13943, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D53 E4 F31 G12 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon, nep-opm and nep-pay
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Cryptocurrencies, currency competition, and the impossible trinity (2022)
Chapter: Cryptocurrencies, Currency Competition, and the Impossible Trinity (2021)
Working Paper: Cryptocurrencies, Currency Competition, and the Impossible Trinity (2019)
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