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Cryptocurrencies, currency competition, and the impossible trinity

Pierpaolo Benigno, Linda Schilling and Harald Uhlig ()

Journal of International Economics, 2022, vol. 136, issue C

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
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Related works:
Chapter: Cryptocurrencies, Currency Competition, and the Impossible Trinity (2021)
Working Paper: Cryptocurrencies, Currency Competition, and The Impossible Trinity (2019) Downloads
Working Paper: Cryptocurrencies, Currency Competition, and the Impossible Trinity (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:136:y:2022:i:c:s0022199622000332

DOI: 10.1016/j.jinteco.2022.103601

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