Discussion paper

DP13943 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. 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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Citation

Benigno, P, H Uhlig and L Schilling (eds) (2022), “DP13943 Cryptocurrencies, Currency Competition, and The Impossible Trinity ”, CEPR Press Discussion Paper No. 13943. https://cepr.org/publications/dp13943