Bitcoin and the PPP Puzzle

Calebe de Roure and Paolo Tasca

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper approaches the PPP puzzle by using the Bitcoin/US Dollar exchange rate. The use of the virtual currency as macroeconomic laboratory allows us to remove frictions that previously impeded the empirical demonstration of the law of one price. We show that price adjustments are still far from perfect due to information asymmetry between agents. Nevertheless, the real exchange rate is stationary and adjusts by 81% within one day. Finally, because of the different speed of information spread, good market arbitrage takes place in the Bitcoin economy but not in the US economy. Thus, we conclude that in a frictionless economy the PPP holds and the speed of arbitrage for the good market depends on the speed of information spread among agents.

Keywords: bitcoin; purchase power parity; silk road (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 5 pages
Date: 2014-07-30
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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