Macro-Financial Impacts of Foreign Digital Money

Anh Le, Alexander Copestake, Brandon Tan, Shanaka Peiris and Umang Rawat

No 2023/249, IMF Working Papers from International Monetary Fund

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, 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.

Keywords: Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy; monetary policy transmission; liquidity services; banking sector stress; stablecoin price; stablecoin issuer; Central Bank digital currencies; Currencies; Bonds; Global (search for similar items in EconPapers)
Pages: 62
Date: 2023-12-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-pay
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