Cryptocurrencies and Cagan’s model of hyperinflation

Urban Jermann

Journal of Macroeconomics, 2021, vol. 69, issue C

Abstract: The drivers of the prices of Bitcoin and Ethereum are studied within a framework based on Cagan’s model of hyperinflation. In the model, the prices of the cryptocurrencies are driven by stochastic adoption and velocity shocks as well as endogenous expectations of future prices. The model is estimated with data for prices, transaction volumes, and money supplies. A majority of price fluctuations in both currencies can be attributed to shocks in adoption, velocity shocks are much less important. The money demand sensitivity to expected price changes is estimated to be larger for Bitcoin than for Ethereum, and both have higher sensitivity than fiat currencies during episodes of hyperinflation.

Keywords: Bitcoin; Ethereum; Money demand; Exchange rates (search for similar items in EconPapers)
JEL-codes: E31 E41 F31 G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:69:y:2021:i:c:s0164070421000446

DOI: 10.1016/j.jmacro.2021.103340

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