Monetary policy in the open economy with digital currencies

By Pietro Cova, Alessandro Notarpietro, Patrizio Pagano and Massimiliano Pisani

We assess the transmission of a monetary policy shock in a two-country New Keynesian model featuring a global private stablecoin and a central bank digital currency (CBDC). In the model, cash and digital currencies are imperfect substitutes that differ as to the liquidity services they provide. We find that in a digital-currency economy, where the stablecoin is a significant means of payment, the domestic and international macroeconomic effects of a monetary policy shock can be smaller or larger than in a (benchmark) mainly-cash economy, depending on how the assets backing the stablecoin supply respond to the shock. The benchmark transmission of the monetary policy shock can nonetheless substantially be restored in the digital-currency economy 1) if the stablecoin is fully backed by cash or 2) if the CBDC is a relevant means of payment.

I guess I need to be educated as to what the value of a fully-backed stablecoin is in the presence of a CBDC. To me they look identical. And it does not look like monetary policy would differ either, even compared to a world without either of them. It all boils down to the fact that imperfectly substitutable goods leads to the same responses if they always move together, and thus for policy purposes they are perfectly substitutable.


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