Macro-Financial Impacts of Foreign Digital Money
IMF Working Papers, December 6, 2023
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Bibliographic details
- Authors: Anh Le, Alexander Copestake, Brandon Joel Tan, Shanaka J Peiris, Umang Rawat
- Published: December 6, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400261107.001
Overview and model
- Development of 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.
Main findings
- Introduction of the foreign stablecoin amplifies currency substitution.
- Amplified currency substitution reduces bank intermediation.
- Reduced bank intermediation weakens monetary policy transmission.
- Weakened monetary policy transmission worsens the impacts of recessionary shocks.
- Increased banking sector stress results from these dynamics.
- 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.
Policy implications and comparisons
- Capital controls can have the unintended consequence of raising stablecoin adoption and exposure to foreign shocks.
- A ban on stablecoin payments in the domestic economy can mitigate the adverse macro-financial effects identified.
- Domestic CBDC differs in effect from foreign stablecoin presence; the model indicates policy responses to foreign stablecoins may need to differ from those for domestic CBDCs.
Publication and metadata
- Title: Macro-Financial Impacts of Foreign Digital Money
- Authors: Anh Le, Alexander Copestake, Brandon Joel Tan, Shanaka J Peiris, Umang Rawat
- Date: December 6, 2023
- Series: IMF Working Papers
- Working Paper No.: 2023/249
- Issue: 249
- Volume: 2023
- Pages: 62
- DOI: https://doi.org/10.5089/9798400261107.001
- Stock No: WPIEA2023249
- ISBN: 9798400261107
- ISSN: 1018-5941
- Subjects: 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
IMF Working Papers. Macro-Financial Impacts of Foreign Digital Money (Working Paper No. 2023/249), December 6, 2023.
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