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Macro-Financial Impacts of Foreign Digital Money
Author:
Anh Le
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Alexander Copestake
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Brandon Tan
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Evan Papageorgiou
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Mr. Shanaka J Peiris
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Umang Rawat https://isni.org/isni/0000000404811396 International Monetary Fund

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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 249
Language:
English
Publication Date:
06 Dec 2023
DOI:
https://doi.org/10.5089/9798400261107.001
ISBN:
9798400261107
ISSN:
1018-5941
Pages:
62
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund