Cryptocurrencies, Currency Competition, and the Impossible Trinity
64 Pages Posted: 22 Aug 2019 Last revised: 22 Feb 2022
There are 4 versions of this paper
Cryptocurrencies, Currency Competition and the Impossible Trinity
Cryptocurrencies, Currency Competition, and the Impossible Trinity
Cryptocurrencies, Currency Competition, and the Impossible Trinity
Cryptocurrencies, Currency Competition, and the Impossible Trinity
Date Written: February 21, 2022
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
JEL Classification: E4, F31, D53, G12
Suggested Citation: Suggested Citation