The Implications of the Incursion of Cryptocurrency on the Effectiveness of Fiscal Policy
Keywords:
E62, F36, F65
Abstract
Existing literature has examined a plethora of factors that can affect the effectiveness, performance or nature of fiscal policy in an economy. In this paper we build on the fundamental tenets of micro-economic models to examine the potential ways cryptocurrencies can affect the effectiveness of a country’s fiscal policy. Our finding is that under the assumptions of an absence of uncertainties, perfectly competitive markets, household utility maximization, and usage of public money and cryptocurrency, the government purchases as well as the ability of the government to raise funds by issuing bonds and by taxation is decreasing in new investments in cryptocurrencies but increasing in the income earned from cryptocurrencies. We go further to discuss the factors that account for a sustained ability of cryptocurrencies to weaken the state’s fiscal-policy capabilities and possible ways the effects of cryptocurrencies on the state’s fiscal integrity can be mitigated.
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[2] Auer,A., & Claessens,S. (2018). Regulating cryptocurrencies: assessing market reactions” BIS Quarterly Review September 2018.
[3] Barnichon, R. & Matthes, C. (2017). Stimulus versus Austerity: The Asymmetric Government Spending Multiplier. CEPR Discussion Papers 10584.
[4] Benigno, P. (2019). Monetary policy in a world of cryptocurrencies. CEPR Discussion Paper No. DP13517.
[5] Benigno, P., Schilling, L.M., & Uhlig, H. (2019). Cryptocurrencies, Currency Competition and the Impossible Trinity. No 13943, CEPR Discussion Papers.
[6] Biais,B., Bisière,C., Bouvard,M & Casamatta,C. (2019). Blockchains, coordination, and forks. In AEA Papers and Proceedings, volume 109: 88-92.
[7] Binance Capital Management. (2021). [Online] Available: https://coinmarketcap.com [17 December 2021]
[8] Bernadini, M & Peersman, G (2018) Private Debt Overhang and the Government Spending Multiplier: Evidence for the United States. Journal of Applied Econometrics, 33:485-508.
[9] Cong, L.W., & He, Z. (2019). Blockchain disruption and smart contracts. The Review of Financial Studies, 32(5):1754-1797.
[10] Canzoneri, M., Collar, F., Dellas, H., & Diba, B, (2016). Fiscal Multipliers in Recessions. Economic Journal 126:75-108.
[11] Chinoy,S.Z. (2021). Brace up for cryptocurrency. The Indian Express. [Online]. Available: https://indianexpress.com/article/opinion/columns/cryptocurrency-challenges-digital-economy-policies-7630023/ [7 November 2021].
[12] Chatenay, V. (2021). “Facebook-backed Diem has cleared regulatory hurdles to finally launch in Q1”. [Online]. Available: https://www.businessinsider.com/facebook-digital-currency-to-finally-launch-q1-2021-2?r=US&IR=T [25 February 2021].
[13] Chiu,J & Koeppl,T.V (2019). The economics of cryptocurrencies of bitcoin and beyond. Staff Working Paper, Document de travail du personnel 2019-40. Canada: Bank of Canada (Banque Du Canada).
[14] Conesa,J.C & Garriga,C. (2008). Optimal fiscal policy in the design of social security reforms. International Economic Review, 49 (1):291-318.
[15] Digital Currency Governance Consortium Compendium Report, (2021). [Online]. Available: https://www3.weforum.org/docs/WEF_Digital_Currency_Governance_Consortium_White_Paper_Series_2021.pdf [22 November 2021].
[16] Dowd, K. (2014). New private monies. A bit-part player?” Institute of economic affairs. United Kingdom: Fraser Institute.
[17] Ebrahimi, Z., Routledge,B., & Zetlin-Jones,A. (2019). Getting blockchain incentives right.” Technical report. Pennsylvania: Carnegie Mellon University Working Paper.
[18] Fernández-Villaverde, J & Sanches, D. (2016). Can currency competition work?” Technical report. Massachusetts: National Bureau of Economic Research.
[19] Freeman, A. (2011). Bitcoin: The ultimate offshore bank account? Economics and Liberty: Observations from a Freeman. [Online]. Available: http://economicsandliberty.wordpress.com/2011/08/23/bitcoin-the-ultimate-offshore-bank-account/ [12 August 2021]
[20] Gali, J., Lopez-Salido, J.D. & Valles, J (2007). “Understanding the Effects of Government Spending on Consumption." Journal of the European Economic Association 5:227-270.
[21] Gemmell, N., Kneller, B., & Sanz, I. (2011). “The timing and persistence of fiscal policy impacts on growth: evidence from OECD countries.” The Economic Journal,121 (550):33-58.
[22] Goolsbee, A. (2001). The implications of electronic commerce for fiscal policy (and vice versa).” The journal of economic perspectives, 15 (1):13 – 23.
[23] Guajardo, J., Leigh, D. & Pescatori, A. (2014). Expansionary Austerity? International Evidence. Journal of the European Economic Association 12 (4): 949-968.
[24] He, D (2018). Monetary policy in the digital age. IMF Finance and Development publications, Vol 55, No 2. [Online]. Available: https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-monetary-policy-and-cryptocurrencies/he.htm [13 March 2021]
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[26] Huberman,G., Leshno,J.,& Moallemi,C.C (2017). Monopoly without a monopolist: An economic analysis of the bitcoin payment system.” Finland: Bank of Finland Research Discussion Paper 27.
[27] Jones, P.M., Olson, E & Wohar. M.E., (2015). Asymmetric Tax Multipliers. Journal of Macroeconomics, 43:38-48.
[28] Jorda,O & Taylor, A.M (2016). The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy." The Economic Journal, 126: 219-255.
[29] Kaminsky, G.L., Reinhart, C.M., & Végh, C.A., (2004). When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies. NBER Macroeconomics Annual, 19:11-53
[30] Lacurci, G (2021). “Crypto Currency Poses a Significant Risk of Tax Evasion. [Online]. Available: https://www.cnbc.com/2021/05/31/cryptocurrency-poses-a-significant-risk-of-tax-evasion.html [10 December 2021].
[31] Leeper,E.M., Traum,N., & Walker,T.B (2017). Clearing Up the Fiscal Multiplier Morass. American Economic Review 107(8): 2409-2454.
[32] Leshno, J.D., & Strack, P. (2020). Bitcoin: An axiomatic approach and an impossibility theorem. American Economic Review: Insights, forthcoming.
[33] Lewis,D.C (2012). Legislative Term Limits and Fiscal Policy Performance. Legislative Studies Quarterly, 37(3):305-328.
[34] Lotz, J.R. (1970). Measuring the Effects of Fiscal Policy in Developing Countries” FinanzArchiv / Public Finance Analysis, New Series, Bd. 29, H. 2, pp. 238-255
[35] Marian,O (2013). “Are Cryptocurrencies Super Tax Havens?” 112 MICH. L. REV. FIRST IMPRESSIONS 38, available at http://scholarship.law.ufl.edu/facultypub/358
[36] Richard, M and Gulcin, O.F., & Trzeciakiewicz, D, (2018) Why Are Fiscal Multipliers Asymmetric? The Role of Credit Constraints. [Online]. Available: https://ssrn.com/abstract=3262309 or http://dx.doi.org/10.2139/ssrn.3262309 [24 July 2020].
[37] Michaillat, P. (2014). A Theory of Countercyclical Government Multiplier" American Economic Journal: Macroeconomics, 6(1):190-217.
[38] Plassaras, N.A. (2013). Regulating Digital Currencies: Bringing Bitcoin within the reach of IMF. Chicago Journal of International Law, 377:387-51.
[39] Prat, J., & Walter, B. (2018). An equilibrium model of the market for bitcoin mining. Cesifo working paper series, CES. Munich: University of Munich.
[40] Rao, T.V.S.R. (1975). Fiscal Policy and Economic Growth: A Neoclassical two Sector Model”. Pakistan Economic and Social Review, 13(1):1-11
[41] Schilling,L. & Uhlig,H. (2018). Some simple bitcoin economics. Technical report, National Bureau of Economic Research.
[42] Tan,S.B and Low,K.Y (2017). Bitcoin – Its Economics for Financial Reporting. Australian Accounting Review, 27(2): 220 227.
[43] Tanzi, V. & Zee, H.H (1997). Fiscal Policy and Long-Run Growth. Staff Papers, International Monetary Fund Vol. 44 (2):179-209.
[44] Telegraph staff (2013). Germany plans tax on bitcoins after virtual currency recognized as Private Money. [Online]. Available: https://www.telegraph.co.uk/finance/globalbusiness/10252383/Germany-plans-tax-on-bitcoin-after-virtual-currency-recognised-as-private-money.html [24 May 2020]
[45] Trautman, L. J., (2018). Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace. [Online] Available: https://ssrn.com/abstract=3182867 [24 June 2020].
Published
2022-06-30
How to Cite
OBU , O. C., & UKPERE, W. I. (2022). The Implications of the Incursion of Cryptocurrency on the Effectiveness of Fiscal Policy. Review of Applied Socio-Economic Research, 23(1), 134-150. https://doi.org/10.54609/reaser.v23i1.214
Section
Articles
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