Monetary Policy in the Open Economy with Digital Currencies

59 Pages Posted: 16 May 2022

Date Written: May 5, 2022

Abstract

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.

Keywords: digital currency, CBDC, monetary policy, international finance

JEL Classification: E51, E52, F30

Suggested Citation

Cova, Pietro and Notarpietro, Alessandro and Pagano, Patrizio and Pisani, Massimiliano, Monetary Policy in the Open Economy with Digital Currencies (May 5, 2022). Bank of Italy Temi di Discussione (Working Paper) No. 1366, Available at SSRN: https://ssrn.com/abstract=4109540 or http://dx.doi.org/10.2139/ssrn.4109540

Pietro Cova

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Patrizio Pagano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
243
Abstract Views
842
Rank
238,444
PlumX Metrics