{"id":4272,"date":"2019-09-05T22:49:59","date_gmt":"2019-09-05T17:19:59","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=4272"},"modified":"2019-09-05T23:10:43","modified_gmt":"2019-09-05T17:40:43","slug":"cryptocurrencies-could-constrain-a-countrys-choices","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/cryptocurrencies-could-constrain-a-countrys-choices\/","title":{"rendered":"Cryptocurrencies could constrain a country\u2019s choices"},"content":{"rendered":"<p><strong>Relevance: mains: G.S paper III: Economy<\/strong><\/p>\n<p><strong>Why in news?<\/strong><\/p>\n<ul>\n<li>There was news of Facebook launching a cryptocurrency called Libra, designed to appeal to its global user base of over 2 billion.<\/li>\n<li>Unlike Bitcoin, which is a roller coaster, Libra will be backed by a basket of fiat currencies.<\/li>\n<\/ul>\n<p><strong>Concept of Trilemma<\/strong><\/p>\n<ul>\n<li>International economics has a concept called the \u201cimpossible trinity\u201d or the \u201ctrilemma\u201d of monetary policy.<\/li>\n<li>It was first defined (independently) by economists John Fleming and Robert Mundell in the early 1960s.<\/li>\n<li>It states that it is impossible to have all three of the following conditions fulfilled at the same time:<\/li>\n<\/ul>\n<p>(1) a fixed foreign exchange rate,<\/p>\n<p>(2) free capital movement (that is, an absence of capital controls) and<\/p>\n<p>(3) an independent monetary policy (which controls domestic money supply, mainly through an interest-rate regime).<\/p>\n<ul>\n<li>The trilemma is a theory based on the \u201cuncovered interest rate parity condition\u201d and is supported by evidence-based studies where governments that have tried to simultaneously pursue all three goals have failed.<\/li>\n<li>The uncovered interest rate parity condition means that if a dollar can only fetch a 1% rate of return in the US, but say 6% in India (at the same levels of risk), investors are bound to move from dollars to rupees.<\/li>\n<li>The reason they don\u2019t is that the differential of 5% will likely reduce to zero as a result of a slide in the rupee\u2019s value to the extent of its current interest differential against the dollar.<\/li>\n<\/ul>\n<p><strong>Way forward<\/strong><\/p>\n<ul>\n<li>Strong capital controls have meant that other means of payment have been in use before, such as the infamous \u201chawala\u201d system. Law enforcement agencies track these down relentlessly.<\/li>\n<li>However, the ease of use and the scope of new Big-Tech cryptocurrencies are about to create global currencies of a completely different class.<\/li>\n<li>The economists begin with a model that considers a two-country system.<\/li>\n<li>Both use their own national currencies as well as a global cryptocurrency.<\/li>\n<li>Assuming markets are efficient and complete, and that the global cryptocurrency is freely used in both countries, they show that the interest rates in both countries must necessarily be equal, and that the exchange rate between the two countries becomes what is termed a<br \/>\n\u201cmartingale\u201d.<\/li>\n<li>A martingale is a sequence of variable numbers where the next number in the sequence, given all prior numbers, is most likely the same as the present value.<\/li>\n<li>Simply put, it means that the best predictor of tomorrow\u2019s value would be today\u2019s value.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: mains: G.S paper III: Economy Why in news? There was news of Facebook launching a cryptocurrency called Libra, designed<\/p>\n","protected":false},"author":1,"featured_media":3247,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,42,43],"tags":[392],"class_list":["post-4272","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4272","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=4272"}],"version-history":[{"count":3,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4272\/revisions"}],"predecessor-version":[{"id":4281,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4272\/revisions\/4281"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/3247"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=4272"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=4272"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=4272"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}