Cryptocurrencies, Currency Competition, and the Impossible Trinity

66 Pages Posted: 7 Oct 2019 Last revised: 29 Mar 2022

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

University of Bern - Department of Economics

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Harald Uhlig

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: August 2019

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: cryptocurrency, currency competition, Exchange Rates, impossible trinity, independent monetary policy, uncovered interest parity

JEL Classification: D53, E4, F31, G12

Suggested Citation

Benigno, Pierpaolo and Schilling, Linda and Uhlig, Harald, Cryptocurrencies, Currency Competition, and the Impossible Trinity (August 2019). CEPR Discussion Paper No. DP13943, Available at SSRN: https://ssrn.com/abstract=3464466

Pierpaolo Benigno (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School ( email )

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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