Macro-Financial Impacts of Foreign Digital Money

By Anh Le, Alexander Copestake, Brandon Tan, Shanaka J Peiris, Umang Rawat

December 6, 2023

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Anh Le, Alexander Copestake, Brandon Tan, Shanaka J Peiris, and Umang Rawat. Macro-Financial Impacts of Foreign Digital Money, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects.

Subject: Bonds, Central Bank digital currencies, Currencies, Financial institutions, Money, Technology

Keywords: Banking sector stress, Bonds, Central Bank digital currencies, Cryptocurrency, Currencies, Financial Frictions, Global, Liquidity services, Monetary policy transmission, Open Economy, Optimal Policy, Stablecoin issuer, Stablecoin price

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/249
Stock No:

WPIEA2023249
ISBN:

9798400261107
ISSN:

1018-5941

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