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.
Publication Date
Systemic Risk Centre Discussion Papers DP 16
