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Cryptocurrencies, Currency Competition, and the Impossible Trinity

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  • Pierpaolo Benigno
  • Linda M. Schilling
  • Harald Uhlig

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.

Suggested Citation

  • Pierpaolo Benigno & Linda M. Schilling & Harald Uhlig, 2019. "Cryptocurrencies, Currency Competition, and the Impossible Trinity," NBER Working Papers 26214, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26214
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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