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Bitcoin and the PPP Puzzle

de Roure, Calebe and Tasca, Paolo (2014) Bitcoin and the PPP Puzzle. SRC Discussion Paper (No 16). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

This paper approaches the PPP puzzle by using the Bitcoin/US Dollar exchange rate. The use of the virtual currency as macroeconomic laboratory allows us to remove frictions that previously impeded the empirical demonstration of the law of one price. We show that price adjustments are still far from perfect due to information asymmetry between agents. Nevertheless, the real exchange rate is stationary and adjusts by 81% within one day. Finally, because of the different speed of information spread, good market arbitrage takes place in the Bitcoin economy but not in the US economy. Thus, we conclude that in a frictionless economy the PPP holds and the speed of arbitrage for the good market depends on the speed of information spread among agents.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2014 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 29 Aug 2014 10:50
Last Modified: 01 Apr 2019 23:06
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/59291

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