Stablecoins: Legal restrictions theory and monetary policy

Jaevin Park and Ohik Kwon

Economics Letters, 2023, vol. 226, issue C

Abstract: This paper studies the effect of introducing stablecoins on monetary policy implementation. In the model, decentralized issuers can provide the monies by holding reserves and government bonds, but it is costly to monitor their collateral. The competitive equilibrium is suboptimal because the individual issuers cannot internalize the effect of issuing money on aggregate liquidity. In a channel system, the open-market operations are ineffective because the issuers can rewind it until there is no profit. However, the monetary policy is effective in a floor system and welfare can improve as the demand for money can be adjusted by the interest on reserves.

Keywords: Limited commitment; Collateral misrepresentation; Externality; Channel system; Floor system (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523001325

DOI: 10.1016/j.econlet.2023.111107

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