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Bitcoin Prices Can Be Used To Detect Economies With Manipulated Currency Exchange Rates



A recently published paper represents a great academic contribution to the process of precise measurement of unofficial forms of exchange rates, or what we can call de facto exchange rate systems, and capital controls. Even though manipulation of exchange rates, as a problem distorting the economy and finance flow, affects only a handful of countries in the whole world, researchers have found that that governments exhibit “fear of floating”. They deceivingly state that they are allowing their exchange rates to float (de jure floating regimen), despite the fact that they are manipulating their exchange rates (de facto manipulated regimen).

When accurate official data is absent, economists rely on indirect methods to identify de facto manipulated regimens. Policy instrument’s volatility , e.g. foreign currency reserves, interest rates….etc, can be utilized to conclude that a smoothed exchange rate, along with volatile policies, represent a non-floating exchange rate regimen. However, along their study in 2015, Klein and Shambaugh, proved that economies can efficiently “mix and match” various policies to achieve smooth exchange rates, e.g. transitory  capital control, along with a minor modification of interest rates; thus, it can be occasionally hard to identify de jure deviations.

A recently published paper utilized bitcoin’s high frequency price changes as a model for addressing this problem. The author of the paper showed that the internationally traded digital currency can predict unofficial exchange rates, help in the identification of exchange rate regimens and identify capital controls within daily frequencies. He used bitcoin’s price data to build a dataset of unofficial day-to-day exchange rate and used it to identify de facto regimens. Apart from exchange rate behavior analysis that relies on commodities’ prices, e.g. oil prices, bitcoin’s lack of legislation and transportation costs, as it is a virtual good, makes it easy to purchase across multiple countries and using a myriad of fiat currencies.

On the other hand, as bitcoin is used as an investment tool, as well as a purchasing vehicle, bitcoin price is periodically updated across various forms of regimens, including currencies of economies with unmanipulated exchange rates.


Results of the study:

The results of the study were quite interesting. The study concluded that economies with a floating exchange rate often have a low barrier, while economies with managed, or manipulated, exchange rates often have intermediates of high mark-up. Nevertheless, the results also concluded that fixed exchange rate can exist in the absence of capital controls; that capital controls may exist in the absence of a fixed exchange rate; and that there exists intermediate combinations. All these observations were made possible via using day-to-day bitcoin prices to construct unofficial exchange rates.


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