Working Paper: CEPR ID: DP12831
Authors: Linda Schilling; Harald Uhlig
Abstract: How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a ``fundamental condition’’, which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a ``speculative'' condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.
Keywords: cryptocurrency; bitcoin; exchange rates; currency competition; indeterminacy
JEL Codes: D50; E42; E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank's policies (E58) | bitcoin prices (G13) |
| speculative behavior (D84) | bitcoin prices (G13) |
| bitcoins (E42) | central bank's transfer decisions (E58) |
| central bank's transfer decisions (E58) | bitcoin prices (G13) |