Cryptocurrencies in Emerging Markets: A Stablecoin Solution?

Download

• Publisher’s site
• Working paper

Abstract

El Salvador’s 2021 monetary experiment to make Bitcoin legal tender increases financial inclusion at the cost of a volatile medium of exchange. We study the macroeconomic effects of introducing cryptocurrencies in a workhorse small open economy model. We model a net positive welfare benefit relative to an economy with no cryptocurrency for the unbanked population when introducing low volatility currencies like stablecoins, and net welfare costs when introducing a high volatility currency like Bitcoin. Cryptocurrency adoption attenuates both domestic and foreign monetary policy transmission, and flexible exchange rates provide an effective buffer against cryptocurrency price shocks. Our findings motivate the increasing use of stablecoins in emerging markets as a hedge against macroeconomic uncertainty.

Welfare gains and cryptocurrency price volatility

Welfare gains are plotted for three different types of households: unbanked, banked and a representative household that aggregates consumption of unbanked and banked households. Welfare gains (vertical axis) are calculated for varying levels of cryptocurrency price volatility (horizontal axis), and are with respect to an economy with no cryptocurrency deposits. The first moment of welfare is calculated using a second order log-linear approximation to the steady state.

Seminars and Presentations

2021: University of Sao Paulo (internal seminar), University of Western Australia (Blockchain and Cryptocurrency Conference)
2022: Federal Reserve Board (internal seminar), San Francisco State University (Innovation, Inclusion, and Risks Conference), Bank of International Settlements (internal seminar), University of Lancaster (Dynare Conference), Barcelona School of Economics (CEBRA Conference), University of Kent (Money, Macro and Finance Society Conference)

Citation

Murakami, D. and Viswanath-Natraj, G., “Cryptocurrencies in Emerging Markets: A Stablecoin Solution?”. Journal of International Money and Finance, Volume 156 (2025) https://doi.org/10.1016/j.jimonfin.2025.103344