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Monetary Policy in the Open Economy With Digital Currencies

Author

Listed:
  • Pietro Cova
  • Alessandro Notarpietro
  • Patrizio Pagano
  • Massimiliano Pisani

Abstract

This paper investigates the transmission of monetary policy within a two‐country New Keynesian model, accounting for both traditional cash and digital currencies, including a global stablecoin and a central bank digital currency, which are treated as imperfect substitutes. Our analysis reveals that if the global stablecoin assumes a significant role as a means of payment, the macroeconomic effects of a monetary policy shock may vary, potentially resulting in outcomes that can be either smaller or larger than those observed in an economy primarily reliant on cash. This result hinges on the response to the shock of the assets backing the supply of the stablecoin. The benchmark monetary transmission can be substantially restored if either the stablecoin is fully backed by cash or the central bank digital currency is a relevant means of payment.

Suggested Citation

  • Pietro Cova & Alessandro Notarpietro & Patrizio Pagano & Massimiliano Pisani, 2026. "Monetary Policy in the Open Economy With Digital Currencies," International Finance, Wiley Blackwell, vol. 29(1), pages 79-91, April.
    • Handle: RePEc:bla:intfin:v:29:y:2026:i:1:p:79-91
    DOI: 10.1111/infi.70010
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary policy in the open economy with digital currencies
      by Christian Zimmermann in NEP-DGE blog on 2022-08-26 23:05:04

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    2. Dirk Niepelt, 2025. "Central Bank Digital Currency and Monetary Architecture," Diskussionsschriften dp2509, Universitaet Bern, Departement Volkswirtschaft.
    3. Andrej Sokol & Michael Kumhof & Marco Pinchetti & Phurichai Rungcharoenkitkul, 2023. "CBDC policies in open economies," BIS Working Papers 1086, Bank for International Settlements.
    4. Le, Anh H. & Copestake, Alexander & Tan, Brandon & Papageorgiou, Evan & Peiris, S. Jay & Rawat, Umang, 2025. "Macro-financial impacts of foreign digital money," Economics Letters, Elsevier, vol. 255(C).
    5. Auer Simone & Branzoli Nicola & Ferrero Giuseppe & Ilari Antonio & Palazzo Francesco & Rainone Edoardo, 2025. "CBDC and the Banking System," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 245(4-5), pages 435-478.
    6. Chen, William & Phelan, Gregory, 2025. "Digital currency and banking-sector stability," Journal of Financial Stability, Elsevier, vol. 78(C).
    7. Ferrari Minesso, Massimo & Siena, Daniele, 2026. "Private money and public debt. U.S. Stablecoins and the global safe asset channel," Working Paper Series 3174, European Central Bank.
    8. Moro, Alessandro & Nispi Landi, Valerio, 2024. "The external financial spillovers of CBDCs," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    9. Karau, Sören, 2023. "Central bank digital currency competition and the impossible trinity," Finance Research Letters, Elsevier, vol. 54(C).
    10. Abad, Jorge & Nuño, Galo & Thomas, Carlos, 2025. "CBDC and the operational framework of monetary policy," Journal of Monetary Economics, Elsevier, vol. 151(C).

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    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General

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