Cryptocurrency: Enforced Monetary Policy

grarpamp grarpamp at
Sun Jan 8 13:30:37 PST 2023

“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.”

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