Macro-financial impacts of foreign digital money

Anh H. Le, Alexander Copestake, Brandon Tan, Evan Papageorgiou, S. Jay Peiris and Umang Rawat

Economics Letters, 2025, vol. 255, issue C

Abstract: 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, which exacerbates the impacts of recessionary shocks and increases banking sector stress.

Keywords: Stablecoins; Open economy; Financial frictions; Optimal policy (search for similar items in EconPapers)
JEL-codes: E50 F30 F31 G15 G18 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525002952

DOI: 10.1016/j.econlet.2025.112458

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