NATIONAL BUREAU OF ECONOMIC RESEARCH
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Cryptocurrencies, Currency Competition, and the Impossible Trinity

Pierpaolo Benigno, Linda M. Schilling, Harald Uhlig

NBER Working Paper No. 26214
Issued in August 2019
NBER Program(s):Asset Pricing Program, International Finance and Macroeconomics Program, The Monetary Economics Program

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. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. 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.

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Document Object Identifier (DOI): 10.3386/w26214

 
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