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.
Published Versions
Cryptocurrencies, Currency Competition, and the Impossible Trinity, Pierpaolo Benigno, Linda M. Schilling, Harald Uhlig. in NBER International Seminar on Macroeconomics 2021, Galí and West. 2022
Pierpaolo Benigno & Linda M. Schilling & Harald Uhlig, 2022. "Cryptocurrencies, Currency Competition, and the Impossible Trinity," Journal of International Economics, . citation courtesy of 
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