No. 1366 - Monetary policy in the open economy with digital currencies

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by Pietro Cova, Alessandro Notarpietro, Patrizio Pagano and Massimiliano PisaniApril 2022

The paper assesses the domestic and international macroeconomic effects, and the impact on monetary policy effectiveness, of the introduction of digital currencies. We use a two-country dynamic general equilibrium model in which the means of payment include, besides cash, a stablecoin (SC), issued by a private fund and used in both countries, and a central bank digital currency (CBDC) issued by the central bank of one country and used only in that country.

When SC prevails as a means of payment, the effects of an expansionary monetary policy shock are smaller, compared to the "standard" case in which cash prevails, if the supply of SC does not sufficiently increase. The standard transmission of the shock is restored if SC is fully backed by cash, or if households show a strong preference for CBDC and the latter can easily substitute for other means of payment.

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