Working Paper: CEPR ID: DP13943
Authors: Pierpaolo Benigno; Harald Uhlig; Linda Schilling
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.
Keywords: currency competition; cryptocurrency; impossible trinity; exchange rates; uncovered interest parity; independent monetary policy
JEL Codes: E4; F31; D53; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global cryptocurrency adoption (E42) | Synchronized monetary policy (F42) |
| Global cryptocurrency adoption (E42) | Equalized nominal interest rates (E43) |
| Equalized nominal interest rates (E43) | Abandonment of national currencies (F31) |
| Global cryptocurrency adoption (E42) | Risk of approaching zero lower bound (E43) |
| Global cryptocurrency adoption (E42) | Tighter restrictions on monetary policy (E52) |
| Tighter restrictions on monetary policy (E52) | Less reconcilable impossible trinity (F31) |
| Deviations from equilibrium (D59) | Significant economic consequences (F69) |