Bubbles in a world asset: the case of Cryptocurrency

Abstract

This paper explores the rational bubbles in cryptocurrency, an international asset with fixed supply and negligible transaction cost, using a simple macroeconomic model. We show that cryptocurrency exhibits oscillatory and volatile dynamics under certain conditions. We also analyze the welfare and spillover effects of cryptocurrency for different parameter values. Cryptocurrencies may increase welfare for agents in economies with certain parameters, such as those with low relative risk aversion or high output elasticity of capital. Cryptocurrency can easily transfer shocks from one country to another through pricing channels or through propagated risk perception. Our paper contributes to the scarce literature on cryptocurrency in macroeconomic contexts.