Cryptocurrencies, Currency Competition, and the Impossible Trinity
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.
Linda Schilling's work was conducted in the framework of the Chair 'Blockchain and B2B Platforms' at Ecole Polytechnique. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.