Monetary policy in the open economy with digital currencies

Pietro Cova, Alessandro Notarpietro, Patrizio Pagano () and Massimiliano Pisani

No 1366, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We assess the transmission of a monetary policy shock in a two-country New Keynesian model featuring a global private stablecoin and a central bank digital currency (CBDC). In the model, cash and digital currencies are imperfect substitutes that differ as to the liquidity services they provide. We find that in a digital-currency economy, where the stablecoin is a significant means of payment, the domestic and international macroeconomic effects of a monetary policy shock can be smaller or larger than in a (benchmark) mainly-cash economy, depending on how the assets backing the stablecoin supply respond to the shock. The benchmark transmission of the monetary policy shock can nonetheless substantially be restored in the digital-currency economy 1) if the stablecoin is fully backed by cash or 2) if the CBDC is a relevant means of payment.

Keywords: digital currency; CBDC; monetary policy; international finance. (search for similar items in EconPapers)
JEL-codes: E51 E52 F30 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon, nep-opm and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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