Macro-Financial Impacts of Foreign Digital Money
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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.
Summary:
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.
Series:
Working Paper No. 2023/249
Subject:
Bonds Central Bank digital currencies Currencies Financial institutions Money Technology
Frequency:
regular
English
Publication Date:
December 6, 2023
ISBN/ISSN:
9798400261107/1018-5941
Stock No:
WPIEA2023249
Format:
Paper
Pages:
62
Please address any questions about this title to publications@imf.org