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Currency stability using blockchain technology

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  • Routledge, Bryan
  • Zetlin-Jones, Ariel

Abstract

To date, cryptocurrency prices are volatile and many cryptocurrency developers have adopted ad hoc approaches to stabilize their cryptocurrency price. When these currencies are not 100% backed by other valued assets, part of their price volatility may arise from self-fulfilling expectations of a speculative attack (as in Obstfeld (1996)). We show that an exchange rate policy, which is less than 100% backed and dynamically adjusts in response to traders’ conversion demand eliminates speculative attacks while, under some conditions, preserving much of the desired exchange rate stability. This dynamic exchange rate policy admits a great deal of discretion to and requires commitment by the party implementing the policy. We demonstrate how to implement this policy using the Ethereum network—a smart contract blockchain environment—and how this implementation yields commitment to the policy.

Suggested Citation

  • Routledge, Bryan & Zetlin-Jones, Ariel, 2022. "Currency stability using blockchain technology," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188921000907
    DOI: 10.1016/j.jedc.2021.104155
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    References listed on IDEAS

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    Cited by:

    1. Gregory, Gadzinski & Alessio, Castello & Vito, Liuzzi & Patrice, Sargenti, 2024. "Break a peg! A study of stablecoin co-instability," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    2. Huang, Xuesong, 2024. "Sophisticated banking contracts and fragility when withdrawal information is public," Theoretical Economics, Econometric Society, vol. 19(1), January.
    3. Lyons, Richard K. & Viswanath-Natraj, Ganesh, 2023. "What keeps stablecoins stable?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    4. Bikramaditya Ghosh & Dimitrios Paparas, 2023. "Is There Any Pattern Regarding the Vulnerability of Smart Contracts in the Food Supply Chain to a Stressed Event? A Quantile Connectedness Investigation," JRFM, MDPI, vol. 16(2), pages 1-12, January.
    5. Kensuke Ito, 2024. "Cryptoeconomics and Tokenomics as Economics: A Survey with Opinions," Papers 2407.15715, arXiv.org.

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    More about this item

    Keywords

    Blockchain; Cryptocurrency; Currency stability; Ethereum; Exchange rates; Fintech; Smart-contract; Speculative attacks; Stable-coin;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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