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Macro-Financial Impacts of Foreign Digital Money

Author

Listed:
  • Anh Le
  • Alexander Copestake
  • Brandon Joel Tan
  • Mr. Shanaka J Peiris
  • Umang Rawat

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, 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.

Suggested Citation

  • Anh Le & Alexander Copestake & Brandon Joel Tan & Mr. Shanaka J Peiris & Umang Rawat, 2023. "Macro-Financial Impacts of Foreign Digital Money," IMF Working Papers 2023/249, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/249
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    Cited by:

    1. Plinio Limata & Federico Ceschel & Chiara Finocchietti & Lucia Marchegiani & Serena Spitalieri, 2024. "The Human Side of Digital Technology: Supporting the Inclusion of Refugees in Higher Education Through Blockchain-backed EQPR," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 15(2), pages 18-41, June.
    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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    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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