Bitcoin Reveals Unofficial Exchange Rates and Detects Capital Controls. [Working Paper: SSRN or Globalization Institute Working Paper 2016-293] Managed exchange rates and capital controls impact international trade and finance flows, yet data used to detect these manipulations are of low frequency, expensive, lagged, and potentially mis-measured. The timely, high frequency, free-of-charge prices of Bitcoin offer a solution to this problem. I demonstrate that the internationally traded crypto-currency can estimate unofficial exchange rates, detect exchange rate regimes; and detect capital controls at a daily frequency. However, Bitcoin prices may contain bitcoin-speci c dynamics that must be removed prior to being used for this purpose, and Bitcoin-based exchange rates approximate the dynamics, but not the level, of unofficial exchange rates.
How does Income Inequality Affect Imports? I study the effect of income inequality on trade flows. Prior papers examining trade on inequality assume that all income groups face identical prices, and that income inequality has no effect on prices of traded goods. I document that higher income inequality increases the value and quantity of imported consumption goods, but lowers the average price. I introduce non-homothetic preferences into a standard monopolistic competition model of trade to generate income-group specific mark-ups and consumption patterns. The model can explain 28% of the observed relationship between inequality dependence and prices, and suggests that the degree of price discrimination between income groups in a country is approximately 5.5%.
Decentralization and Democratization of the Ledger? Blockchain as a Disruptive Technology Bitcoin is the most visible application of Blockchain technology which has the power to disrupt many centralized record systems. This paper offers a high level overview of what blockchain technology *is*, its promises, and its limitations.
We document systematic differences in bitcoin prices across 11 different markets representing 26% of global bitcoin trade volume. These differences must --- due to the identical nature of all bitcoin--- result from characteristics of markets themselves. We examine differences across the markets and find that those which do not require customer identification for establishing an account are more likely to deviate from representative market prices than those which do. This implies that standard financial regulations, specifically know-your-customer regulations, can have a non-negligible impact on the bitcoin market.
The border-free nature of decentralized, virtual currencies --- Bitcoin is only one example --- presents an interesting challenge for monetary policy which assumes some amount of government control over cross-border financial flows and exchange rates. At the extreme, decentralized virtual currencies systems may force all countries to accept floating exchange rates and unrestricted financial flows.