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Bitcoin as a Currency: A Theoretical Framework of Bitcoin’s Supply Effect on Consumption and Inflation
This thesis examines the macroeconomic effects of Bitcoin's fixed money supply within a dynamic general equilibrium context. Traditional Keynesian economics proposes that central banks regulate the money supply through interest rate manipulation and monetary interventions to promote economic stabili...
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| Format: | Thesis |
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AUC Knowledge Fountain
2025
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| Summary: | This thesis examines the macroeconomic effects of Bitcoin's fixed money supply within a dynamic general equilibrium context. Traditional Keynesian economics proposes that central banks regulate the money supply through interest rate manipulation and monetary interventions to promote economic stability within the market. However, cryptocurrencies, like Bitcoin, present a challenge due to their algorithmically predetermined supply, which halves every four years, removing discretionary monetary policy. By adapting Calvo's (1983) staggered-price model to a closed economy, supposing Bitcoin is the only medium of exchange, it is deduced that Bitcoin's deflationary nature causes a persistent consumption collapse and hyper deflationary spirals. Furthermore, calibrations reveal that the absence of monetary stabilization mechanisms at any price rigidity level leads to volatile demand shocks and economic instability. The findings align with Friedman's (1969) and Claeys et al.’s (2018) critiques. They underscore Bitcoin’s limitations as a viable currency and highlight the need for a hybrid mechanism to counteract its scarcity with macroeconomic stability. This research builds on the literature by formalizing the trade-offs inherent in decentralized monetary policies and providing quantitative evidence of Bitcoin’s destabilizing effects under New Keynesian economics. |
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