Estimating the Impact of Digital Money on Cross-Border Flows: Scenario Analysis Covering the Intensive Margin
Fintech Notes, February 7, 2025
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Bibliographic details
- Authors: Eugenio M Cerutti, Melih Firat, Hector Perez-Saiz
- Published: February 7, 2025
- Series: Fintech Notes
- DOI: https://doi.org/10.5089/9798229000611.063
Overview and Objective
- Authors: Eugenio M Cerutti, Melih Firat, Hector Perez-Saiz
- Publication date: February 7, 2025
- Series: Fintech Notes No 2025/002, Issue 002, Volume 2025, Pages: 36
- DOI: https://doi.org/10.5089/9798229000611.063
- ISBN: 9798229000611
- ISSN: 2664-5912
- Objective: Empirical analysis of the potential impact of digital money on the volume and transaction costs of cross-border payments, focusing on the short-term intensive margin.
Market Context and Motivation
- The cross-border payments market is very large.
- Retail transactions have a low share of total cross-border flows but exhibit the highest transaction costs, particularly for remittances.
- Digital money and digital payments innovations have the potential to reduce costs, enhance speed, and improve transparency in cross-border payments.
Methodology and Scenario Assumptions
- Illustrative scenarios assume an estimated 60 percent reduction in transaction costs.
- Short-term elasticities to changes in costs are estimated from remittances data.
- Focus: short-term intensive margin (i.e., changes in transaction-level behavior given cost reductions).
Key Results and Findings
- Primary outcomes from empirical scenarios:
- Cross-border volume increases could be sizable for countries that are large remittance recipients and face expensive transaction costs.
- Even with a large drop in transaction costs (60 percent), the short-term rise in global cross-border transaction volumes could be limited due to the low transaction costs of the wholesale segment.
- Interpretation:
- The heterogeneous structure of the market (retail vs. wholesale) shapes aggregate short-term impacts; retail cost reductions matter most where remittances are a large share and currently costly.
- The short-term intensive-margin analysis may understate longer-run transformative effects.
Longer-Run and Broader Implications
- Moving beyond the short-term intensive margin, the potential impact of digital currencies and other digital payments innovations could be much larger.
- Combined developments—digital currencies, tokenization of assets on programmable platforms—could:
- Move the financial system into a transformative new era.
- Foster financial development.
- Promote further financial inclusion across borders.
Subjects and Keywords (as listed)
- Subjects: Anti-money laundering and combating the financing of terrorism (AML/CFT), Balance of payments, Central Bank digital currencies, Correspondent banking, Crime, Financial services, Remittances, Technology
- Keywords: Anti-money laundering and combating the financing of terrorism (AML/CFT), Central Bank digital currencies, Correspondent banking, cross-border payment, cross-border payments, Digital money, digital payments, Global, IMF Fintech Brownbag Seminar, IMF seminar, payments innovation, Remittances, scenario analysis, transaction costs
Policy-Relevant Considerations (implied by analysis)
- Targeted reductions in retail transaction costs can have meaningful effects for remittance-receiving countries that face high costs.
- Policymakers should account for market segmentation (retail vs. wholesale) when evaluating expected aggregate short-term changes in cross-border volumes.
- To realize larger and more systemic benefits, complementary innovations (digital currencies, tokenization, programmable platforms) and supportive policy frameworks are likely necessary to foster financial development and cross-border inclusion.
Source: "Estimating the Impact of Digital Money on Cross-Border Flows: Scenario Analysis Covering the Intensive Margin", Fintech Notes 2025, 002 (2025), Eugenio M Cerutti, Melih Firat, Hector Perez-Saiz, February 7, 2025.
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- Ftnea2025002