DP13943 Cryptocurrencies, Currency Competition, and The Impossible Trinity

Author(s): Pierpaolo Benigno, Linda Marlene Schilling, Harald Uhlig
Publication Date: August 2019
Date Revised: February 2022
Keyword(s): cryptocurrency, currency competition, Exchange Rates, impossible trinity, independent monetary policy, uncovered interest parity
JEL(s): D53, E4, F31, G12
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13943

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.