https://researchdatabase.minneapolisfed.org/downloads/fj2362424
Abstract
In an economy with incomplete markets and consumers who are sufficiently risk averse,
we show that the government can uniquely implement a permanent primary deficit us-
ing nominal debt and continuous Markov strategies for primary deficits and payments to
debtholders. But this result fails if there are also useless pieces of paper (bitcoin for short) that can be traded. If there is trade in bitcoin, then there is no continuous Markov strategy for the government that leads to unique implementation. Instead, there is a continuum of equilibria with distinct real allocations in which the price of bitcoin converges to zero. And there is a balanced budget trap: continuous government policies designed for a permanent primary deficit cannot eliminate an alternative steady state in which r - g = 0 and the government is forced to balance its budget. A legal prohibition against bitcoincan restore unique implementation of permanent primary deficits, and so can a tax on bitcoin at the rate -(r - g) > 0.