Bitcoin Reveals Exchange Rate Manipulation and Detects Capital Controls. [Working Paper: SSRN (newest version) or Globalization Institute Working Paper 2016-293, Online Appendix] Many countries manipulate the value of their currency or use some form of capital control, yet the data usually used to detect these manipulations are low frequency, expensive, lagged, and potentially mis-measured. I demonstrate that the price data of the internationally traded cryptocurrency Bitcoin can approximate unofficial exchange rates which, in turn, can be used to detect both the existence and the magnitude of the distortion caused by capital controls and exchange rate manipulations. However, I document that bitcoin exchange rates contain problematic bitcoin-market-specific elements and must be adjusted before being used for this purpose. As bitcoin exchange rates exist at a daily frequency, they reveal transitory interventions that would otherwise go undetected. This result also serves as verification that Bitcoin is used to circumvent capital controls and manipulated exchange rates.
How does Income Inequality Affect Import Prices? 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%.
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.
This article gives a very general introduction to the technology, promises and limitations of blockchain technology --- popularized by the digital currency Bitcoin and a key force behind the surge of cryptocurrencies. Blockchain acts as a distributed database or joint global register of all transactions --- a decentralized digital ledger --- and has the potential to become a disruptive force in the financial industry and elsewhere, bypassing traditional, centralized channels such as banks.