DP13943 Cryptocurrencies, Currency Competition, and The Impossible Trinity

Author(s):	Pierpaolo Benigno, Linda Marlene Schilling, Harald Uhlig
Publication Date:	August 2019
Date Revised:	September 2019
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. 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.