Discussion Paper Details

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Title: Cryptocurrencies, Currency Competition, and The Impossible Trinity

Author(s): Pierpaolo Benigno, Linda Marlene Schilling and Harald Uhlig

Publication Date: August 2019

Keyword(s): cryptocurrency, currency competition, Exchange Rates, impossible trinity, independent monetary policy and uncovered interest parity

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Benigno, P, Schilling, L and Uhlig, H. 2019. 'Cryptocurrencies, Currency Competition, and The Impossible Trinity '. London, Centre for Economic Policy Research.