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Macro-financial impacts of foreign digital money

Author

Listed:
  • Le, Anh H.
  • Copestake, Alexander
  • Tan, Brandon
  • Papageorgiou, Evan
  • Peiris, S. Jay
  • Rawat, Umang

Abstract

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, which exacerbates the impacts of recessionary shocks and increases banking sector stress.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525002952
    DOI: 10.1016/j.econlet.2025.112458
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    2. Tan, Brandon Joel, 2024. "Central bank digital currency and financial inclusion," Journal of Macroeconomics, Elsevier, vol. 81(C).
    3. Di Casola, Paola & Habib, Maurizio Michael & Tercero-Lucas, David, 2025. "Global and local drivers of Bitcoin trading vis-à-vis fiat currencies," Journal of International Money and Finance, Elsevier, vol. 158(C).

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    Keywords

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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