Macro-Financial Implications of Foreign Crypto Assets for Small Developing Economies
December 6, 2023
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To explore risks associated with digital money, this Fintech Note simulates the hypothetical large-scale adoption of crypto assets in a model of a small open economy. The model highlights that a foreign-currency denominated stablecoin can amplify currency substitution and capital outflows in response to negative shocks. Monetary policy transmission is also weakened, forcing the central bank to adjust interest rates more aggressively in response to shocks. Capital flow management measures—if they do not constrain crypto flows—further incentivize households to hold foreign stablecoins for circumvention purposes, exacerbating the negative effects of crypto adoption on the macroeconomy. This underscores that widespread crypto adoption can weaken policymakers’ available options for mitigating external shocks and potentially increase cross-country spillovers.
Subject: Central Bank digital currencies, Currencies, Dollarization, Economic sectors, Financial crises, Monetary policy, Money, Technology
Keywords: capital flow management measure circumvention, CBDC, Central Bank digital currencies, crypto asset adoption, crypto assets, cryptoization, Currencies, digital money, Dollarization, Global, IMF Fintech Note 2023/012, macro-financial risk, Macrofinancial implication, monetary policy shock, stablecoins, store of value
Pages:
26
Volume:
2023
DOI:
Issue:
012
Series:
Fintech Notes No 2023/012
Stock No:
FTNEA2023012
ISBN:
9798400258367
ISSN:
2664-5912
