Working Paper: NBER ID: w26214
Authors: 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.
Keywords: cryptocurrencies; currency competition; monetary policy; impossible trinity
JEL Codes: D53; E4; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adoption of a global cryptocurrency (E42) | Synchronized nominal interest rates (E43) |
| Synchronized nominal interest rates (E43) | Maintaining the use of national currencies (F33) |
| Global currency backed by interest-bearing assets (F33) | Additional constraints on monetary policy (E49) |
| Additional constraints on monetary policy (E49) | Reinforced impossibility of independent monetary policy, fixed exchange rate, and free capital flows simultaneously (F33) |
| Central bank's attempt to adjust interest rates (E52) | Undesirable outcomes (e.g., trapped at zero lower bound or abandonment of national currency) (E49) |