Cryptocurrencies in Emerging Markets: a Stablecoin Solution?

Central Bank Digital Currency and Cryptocurrency in Emerging Markets

“…With the fixed return of CBDC as 1, we assume that CBDC is only used for payment but not for saving. However, different from the results of Murakami and Viswanath-Natraj (2021), I find that allowing bankers to hold cryptocurrencies can mitigate the negative effect of some shocks because the return of cryptocurrency is partly shielded from changes in the policy rate. This allows the banking sectors to have more options in funding sources.…”

“…On the household side, different from Murakami and Viswanath-Natraj (2021), we assume there is only one type of representative household that has physical cash, cryptocurrencies, and CBDC in their utility function. The representative household consists of a continuum of households of measure unity following DSGE literature.…”

“…Households can hold deposits into banking sectors, D t , cryptocurrency, Cryp t , and CBDC, DC t . Following Asimakopoulos, Lorusso and Ravazzolo (2019), Murakami and Viswanath-Natraj (2021) and Minesso, Mehl and Stracca (2022), I include all three instruments inside the utility function. Follow Woodford (2003), households can derive utility from liquidity service because they need liquid instruments for payment.…”

“…First, I include the presence of cryptocurrencies similar to Sockin and Xiong (2018) and Asimakopoulos, Lorusso and Ravazzolo (2019). However, I allow the banking sector to take cryptocurrencies as a deposit following Murakami and Viswanath-Natraj (2021). This extension aims to reflect the fact that the banking sector started incorporating cryptocurrencies into its balance sheet.…”

“…This allows the banking sectors to have more options in funding sources. The main reason for our contrast can be traced back to the fact that I implement a different form of the utility function and assume the household can hold cash, CBDC and cryptocurrency at the same time compared to Murakami and Viswanath-Natraj (2021). This gives rise to a substitution effect for households in responding to shocks.…”