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Stablecoins: Legal restrictions theory and monetary policy

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  • Park, Jaevin
  • Kwon, Ohik

Abstract

This paper studies the effect of introducing stablecoins on monetary policy implementation. In the model, decentralized issuers can provide the monies by holding reserves and government bonds, but it is costly to monitor their collateral. The competitive equilibrium is suboptimal because the individual issuers cannot internalize the effect of issuing money on aggregate liquidity. In a channel system, the open-market operations are ineffective because the issuers can rewind it until there is no profit. However, the monetary policy is effective in a floor system and welfare can improve as the demand for money can be adjusted by the interest on reserves.

Suggested Citation

  • Park, Jaevin & Kwon, Ohik, 2023. "Stablecoins: Legal restrictions theory and monetary policy," Economics Letters, Elsevier, vol. 226(C).
    • Handle: RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523001325
    DOI: 10.1016/j.econlet.2023.111107
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    References listed on IDEAS

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    More about this item

    Keywords

    Limited commitment; Collateral misrepresentation; Externality; Channel system; Floor system;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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