We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange-rate economics. Stablecoins solve the volatility problem by pegging to a national currency, typically the US dollar, and are used as vehicles for exchanging national currencies into non-stable cryptocurrencies, with some stablecoins having a ratio of trading volume to outstanding supply exceeding one daily. Using a rich dataset of signed trades and order books on multiple exchanges, we examine how peg-sustaining arbitrage stabilizes the price of the largest stablecoin, Tether. We find that stablecoin issuance, the closest analogue to central-bank intervention, plays only a limited role in stabilization, pointing instead to stabilizing forces on the demand side. Following Tether's introduction to the Ethereum blockchain in 2019, we find increased investor access to arbitrage trades, and a decline in arbitrage spreads from 70 to 30 basis points. We also pin down which fundamentals drive the two-sided distribution of peg-price deviations: Premiums are due to stablecoins' role as a safe haven, exhibiting, for example, premiums greater than 100 basis points during the COVID-19 crisis of March 2020; discounts derive from liquidity effects and collateral concerns.
Kripto para olarak da adlandırılan dijital para fiyatlarındaki değişimler son yıllarda yatırımcıların oldukça ilgisini çekmiştir. Hızlı fiyat değişimlerinden getiri elde etmek isteyen yatırımcılar yeni bir varlık olan dijital paralara yönelmişlerdir. Bu doğrultuda, dijital paraların geleneksel menkul kıymetlerine alternatif olma ihtimalleri tartışılmaya başlanmıştır. Çalışmada, Bitcoin fiyatları ile Borsa İstanbul arasındaki eşbütünleşme ve nedensellik ilişkisini tespit etmek amaçlanmıştır. Bu kapsamda, Engle-Granger ve Gregory-Hansen eşbütünleşme testleri ile Toda-Yamamoto ve Hacker-Hatemi-J nedensellik testlerinden faydalanılmıştır. Bulgular, her iki eşbütünleşme testine göre Bitcoin fiyatları ile Borsa İstanbul endeks değeri arasında orta ve uzun vadede bir eşbütünleşme ilişkisinin olmadığını; nedensellik testlerinden sadece Toda-Yamamoto nedensellik testine göre Borsa İstanbul’dan Bitcoin fiyatlarına doğru tek yönlü nedensellik ilişkisi olduğunu göstermiştir.
Purpose - This study conducts an analysis to reveal the interaction between Bitcoin and Exchange Rates to find out whether Bitcoin is becoming a substitution for the exchange rates.Methodology - To investigate the mutually interaction between the exchange rates and the Bitcoin, the interaction (relationship) between daily closing price of both exchange rates and Bitcoin was analyzed through the Var model. Thus, it was tried to show the sensitivity of the values of Bitcoin to the changes occured in the exchange rates.Findings - Based on Variance Decomposition analysis, BITCOIN and Euro can be considered as largely external variables and their prices are not significantly affected by USD. An interesting result in this study is that the USD exchange rate was found to be significantly sensitive to the Euro.Conclusion - Findings obtained from analysis show that Bitcoin and Excange Rates have not become an alternative tools for each other yet.
Objective: to consider the features of centralized and decentralized monetary systems development and to identify the necessary conditions for the transition of the national economy to decentralized network platforms operating within the distributed ledger technology, public and private digital currencies.Methods: a systemic approach to the cognition of economic phenomena, enabling to study them in dynamic development, taking into account the influence of various environmental factors. The systemic approach determined the choice of specific research methods: empirical, historical, logical, comparative and statistical.Results: the article considers different approaches to the organization of money issue. It is shown that the era of the centralized monetary system, based on the issue of Central banks, has come to its end. The Central bank is the main link of the centralized monetary system, while in the context of 2008 financial crisis the functions of the Central Bank as the lender of last resort were significantly expanded by changing the paradigm of the monetary mechanism. It is established that the new monetary mechanism has become the main channel of money supply in the economy, while the main factors of the new monetary supply formation are the reserve money of Central banks, new Basel standards and high requirements for borrowers. This monetary policy and the centralization of the financial market have led to a distortion of the market pricing mechanism in the monetary market and to the disruption of competition in the financial intermediation market. The author analyzes the new trends in the emergence of a decentralized monetary system in the world economy based on public and private digital currencies issued by users of distribution computer networks. The article shows the mechanism and technology of crypto currency emission, which implies the use of public or private blockchain without any participation of the Central bank and other financial intermediation institutions.Scientific novelty: for the first time, the article shows that the era of centralized monetary system based on monopoly issue by Central banks, has come to its logical end; a decentralized monetary system is emerging in the world economy today, based on public and private issue of digital currency; in the course of legalization, growth of scalability, confidentiality, validation and tokenization of real assets, the crypto currencies will become a liquid and less volatile monetary asset.Practical significance: the main provisions and conclusions of the article can be used to clarify the target mandates, tools, channels and mechanisms of monetary policy of the Bank of Russia, capable of launching a decentralized crypto currency market, acting as a built-in stabilizer of financial sustainability and elastic regulation of trade and financial imbalances within the country and between countries.
Concha Artola, María Gil Izquierdo, Javier J. Pérez, Alberto Urtasun · 6 authors
In highly decentralized countries the subnational dimension of economic developments acquires particular relevance, given the existence of potential spillover effects across jurisdictions or the existence of asymmetric impacts of national-wide macroeconomic shocks. At the same time, though, the analysis of sub-national macroeconomic and public finance short-term developments tend to be restricted in many countries due to data limitations. Against this backdrop, the aim of this paper is to provide an overview of the available data for monitoring macroeconomic and public finance developments at the regional level in Spain, and to present some examples of its practical use in real time. After a thoroughly review of the publicly available information, we identify two key informational gaps in this area of conjunctural analysis, namely: (i) the lack of homogeneous and official quarterly measures of aggregate regional economic activity (in particular, real GDP), and (ii) the limited sample size of time series pertaining to government budgetary developments at the regional level.
Following the popularity of Bitcoin trading in recent years, Bitcoin futures were introduced in December 2017 as an effort to provide institutional and retail investors with additional trading tools for Bitcoin. This study analyses the Bitcoin futures mid-quote data from CBOE, and Bitcoin market index applying VAR and VECM process methodologies, Hasbrouck’s information share and the Gonzalo-Granger component share measurement to examine price discovery in Bitcoin markets. Furthermore, the chapter seeks to assess the Bitcoin market microstructure. The results drawn on the intra-day prices show that the futures are leading the price discovery at different frequencies even with comparably low futures trading volumes. This supports the extant literature of futures-spot market price discovery and the role of informed traders in the futures market.
I show that the prices of the internationally traded crypto-currency bitcoin can be used to estimate a currency's unofficial exchange rate and capital controls at a daily interval. Two important bitcoin features are documented: (1) Bitcoin-based exchange rates approximate the behavior, but not the level, of unofficial exchange rates, and (2) Bitcoin prices contain a bitcoin-trend term and must be appropriately normalized prior to being used for this purpose. Bitcoin-based exchange rates reveal that (3) there is no consistent pattern of Granger causality between unofficial rates and official rates by exchange rate regime or barriers at the daily frequency, and (4) that countries can engage in short-interval capital controls.
We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.
Bitcoin gains more and more attention in the general public and is already the most popular virtual currency. At the same time, the acceptance of Bitcoin as a speculative asset and also as a payment vehicle increases. This is an indication that we might now be entering an era of parallel currency systems. Therefore, one could state that the Bitcoin network and the central banking system could become two rival systems with respect to issuing payment vehicles and providing cross-border payment systems. Our aim is to analyse the central bank incentives for establishing a network model that includes hacking. With our model we are able to explain why central banks have no incentive to advance Bitcoin regulation at the current stage of development, as this would reduce the critical mass of Bitcoin users. Finally, in combination with a central bank loss function, we are able to calculate an optimal level of central regulation.
This dissertation contains three essays on Macroeconomics and Finance. The first chapter has been motivated by the fact that recoveries from financial crises are characterized by low investment rates and declines in capital stocks. The paper constructs an equilibrium framework in which financial shocks have a persistent effect on aggregate investment. The key assumption is that physical capital is traded in a decentralized market with search frictions, generating ``capital unemployment.'' After a negative financial shock, the share of unemployed capital is high, and the economy dedicates more resources to absorbing existing unemployed capital into production, and less to accumulating new capital. An estimation of the model for the U.S. economy using Bayesian techniques shows that the model can generate the investment persistence and half of the output persistence observed in the Great Recession. Investment search frictions also lead to a different interpretation of the sources of business-cycle fluctuations, with a larger role for financial shocks, which account for 33 percent of output fluctuations. Extending the model to allow for heterogeneity in match productivity, the framework also provides a mechanism for procyclical capital reallocation, as observed in the data. The second and third chapters focus on labor unemployment during financial crises. The second chapter uses a sample of 116 recession episodes in developed and emerging market economies to compare the labor-market recovery during financial crises with that of other recession episodes. It documents two new stylized facts. First, labor-market recovery from financial crises is characterized by either higher unemployment (``jobless recovery'') or a lower real wage (``wageless recovery''). Second, inflation determines the type of recovery: low inflation (below 30 percent annual rate) is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that this pattern of labor recovery from financial crises is consistent with a simple model in which collateral requirements are higher (lower) when a larger share of labor costs (physical capital expenditure) is involved in a loan contract. The third chapter paper conducts a quantitative study of the optimal exchange-rate policy in a small open economy that faces the ``credit access-unemployment'' trade-off: In the presence of nominal wage rigidity, exchange-rate depreciation reduces unemployment; in the presence of collateral constraints linking external debt to the value of income, exchange-rate depreciation tightens the collateral constraint and leads to higher consumption adjustment. It is shown that the optimal policy during financial crises generally features large currency depreciation, since welfare costs related to higher unemployment and lower consumption typically outweigh welfare costs associated with intertemporal misallocation of consumption. The optimal policy also implies a lower currency depreciation than that necessary to achieve full employment, which is consistent with a managed-floating exchange-rate policy, frequently observed during financial crises in emerging market economies. Sudden stops (or large current-account adjustments) are part of the endogenous response to large negative shocks under the optimal exchange-rate policy.
This paper explores the recent development of digital currencies—currencies which are creatures of the Internet, self-authenticating, and usable worldwide by members of the general public to engage in the same types of direct, one-to-one transactions that daily occur using government-issued currencies. At present, the most developed digital currency measured by market capitalization is Bitcoin, which will be used as a proxy for the general phenomenon. Not surprisingly, as Bitcoin’s circulation and visibility has increased, so have the number of practical and legal issues surrounding its use. Some of these will be explored in this paper, with a view to considering the utility and viability of such currencies for widespread, global use.
Bitcoin is a decentralized, open-source cryptocurrency used to make private, peer-to-peer transactions anywhere across the world. Although the individuals involved are (mostly) anonymous, every Bitcoin transaction is a matter of public record; anyone can view every Bitcoin transaction ever made. Following the methodology developed by Evans and Lyons (2002), this paper adapts and estimates a FX microstructure model that emphases order flow, the difference between buyer- and seller-initiated trading volume, to the Bitcoin market Using a data set consisting of all major currency transactions occurring on the Mt. Gox exchange, our results are quite similar to prior microfinance research on traditional currencies insofar order flow is a significant determinant of Bitcoin spot rates.
Bitcoins have emerged as a possible competitor to usual currencies, but other\ncrypto-currencies have likewise appeared as competitors to the Bitcoin\ncurrency. The expanding market of crypto-currencies now involves capital\nequivalent to $10^{10}$ US Dollars, providing academia with an unusual\nopportunity to study the emergence of value. Here we show that the Bitcoin\ncurrency in itself is not special, but may rather be understood as the\ncontemporary dominating crypto-currency that may well be replaced by other\ncurrencies. We suggest that perception of value in a social system is generated\nby a voter-like dynamics, where fashions form and disperse even in the case\nwhere information is only exchanged on a pairwise basis between agents.\n
Bitcoins are digital gold. They are a purely electronic commodity traded for speculative purposes as well as in exchange for goods and services. Just like physical gold, the relative price of bitcoins denominated in different currencies implies a nominal exchange rate. This is a departure from previous literature which treats bitcoin prices themselves as nominal exchange rates. I argue that treating prices as exchange rates is inappropriate as one would not consider the price of physical gold to be an exchange rate. Therefore, this paper characterizes the behavior of nominal exchange rates implied by relative bitcoin prices. I show that the implied nominal exchange rate is highly cointegrated with the nominal exchange rate determined in conventional foreign currency exchange markets. I also show that the direction of causality flows from the conventional markets to the bitcoin market and not vice-versa which can explain much of the volatility in bitcoin prices.
Bitcoin has enabled competition between digital cryptocurrencies and traditional legal tender fiat currencies. Despite rapidly increasing acceptance, so far the affirmation of cryptocurrency as better money has been thwarted by dramatic deflationary price instability. Successful at disposing of any central monetary authority, bitcoin has elected to have a fixed deterministic inelastic monetary policy, establishing itself more as digital gold than as a currency. Price stability could be achieved by dynamically rebasing the outstanding amount of money: the number of cryptocurrency units in every digital wallet is adjusted instead of each single unit changing its value. The apparent awkwardness of this unfamiliar paradigm is discussed at length, proving that its only real novelty is about fairness and effectiveness. Furthermore, suggestions are provided about how to ease the effect of contractionary monetary policy. The proposed monetary base adjustment has neutral impact on the overall wallet wealth, as it does not introduce any arbitrary distortion into the intrinsic value dynamics of the wallet. The adjustment is based on a commodity price index determined with a resilient consensus process that does not rely on central third party authorities. It is posited in this paper that a digital cryptocurrency adopting elastic monetary standard is Hayek Money, so named from the Nobel Prize-winning economist: a good money standard providing stable prices for a new economic era.