Fintech Notes

Macro-Financial Implications of Foreign Crypto Assets for Small Developing Economies

Author/Editor:

Alexander Copestake ; Anh Le ; Evan Papageorgiou ; Brandon Tan

Publication Date:

December 6, 2023

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

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.

Series:

Fintech Notes No 2023/012

Subject:

Central Bank digital currencies Currencies Dollarization Economic sectors Financial crises Monetary policy Money Technology

Frequency:

occasional