OKEx Research Recommended Reading: IMF Digital Currency Working Paper (Part 2)
Original title: "OKEx Research Recommended Reading: IMF Digital Currency Working Paper (Part 2)"
Original source: OKEx Research
Guide
On September 22, 2020, the International Monetary Fund (IMF) completed the article "Digital Currency for Cross-Border Payments: Macro-Financial Impact", focusing on the Four application scenarios of digital currencies for cross-border payments, as well as specific analysis of these scenarios. Due to the length of the original working paper, we split it into three and published it separately. This article is the third of the original working paper.
The first article introduces what are CBDC and GSC, the factors affecting the adoption of CBDC and GSC, and the adoption of CBDC and four hypothetical scenarios for GSC. The second article analyzes the macro-financial implications of these four scenarios. This article discusses the impact of four hypothetical scenarios on macro policy, trading restrictions, legal framework, regulatory policy and structural policy. For countries that use CBDC and GSC in different scopes, what kind of macro policy does the IMF think national policy makers should adopt? Reserve a certain amount of margin. When the monetary policy fails, the country should adopt fiscal policy as a tool to stabilize the macroeconomy; for countries that have restrictions on the use of CBDC and GSC in different scenarios, how to evaluate their effective implementation scope, Including technical support and obligations undertaken in international bilateral treaties; how the current legal framework is reviewed in the four scenarios of adopting CBDC and GSC, and effectively combating AML/CFT; how the competent authorities may generate There are still major challenges in how to reach a global consensus to tailor regulatory policies according to the risk situation; what kind of structural policies can be introduced to ensure the legitimate rights of consumers? These are the issues discussed in this article.
This article was translated by the assistant analysts Angela and Cici Chen of the Institute, and the chief analyst William was responsible for the review.
Policy Impact
A. Macro Policy
1. In countries with strong incentives to adopt and use foreign CBDC and GSC , policymakers need to decide whether to accept greater currency substitution or resist currency substitution by strengthening the credibility of monetary policy and/or limiting its use.
Maintaining a sound fiscal position and maintaining the independence of the central bank, backed by effective legal and regulatory is the best hope for alleviating or responding to currency substitution pressures. When monetary policy is blocked or ineffective, a mix of other policy tools needs to be considered under an integrated policy framework (IPF) that includes fiscal, macroprudential policies, foreign exchange intervention measures, and cash flow management to mitigate the impact of the shock.
2. Some central banks are considering issuing their own CBDC as a strategic response to foreign CBDC or GSC alternative currencies.
However, if the local currency suffers from instability and is not suitable as a measure of value, the issuance of CBDC is unlikely to change this situation. More broadly, the circumstances under which a CBDC is issued may depend on country circumstances. Any decision requires careful ex ante cost and benefit analysis and key design choices (Mancini-Griffoli and others, 2018; Kiff and others, 2020).
3. When domestic monetary policy is hampered or ineffective, countries will need to rely more on fiscal policy as a tool for macroeconomic stabilization.
When their business cycles are out of sync with those of the currency-issuing country, they have a greater need for fiscal policy to cushion the blow. In the case of global adoption of GSCs, it is also unclear whether the monetary stance of GSC issuers (i.e., the amount issued, or the level of interest or fees) is consistent with the need to stabilize the business cycle of the local economy. Therefore, local governments will need to ensure sufficient fiscal policy space to be able to adjust revenue and spending policies to business cycle conditions while maintaining the long-term sustainability of national finances. In fact, CBDCs and GSCs may also make it more difficult to ensure fiscal sustainability, as they can make it easier for citizens to circumvent financial repression, and governments may gradually find such tools attractive in high-debt situations. Other policies, including macroprudential policies, foreign exchange intervention, and CFMs, have specific objectives but can also be used to some extent to help countries without fiscal space cope with macroeconomic shocks.
4. In order to maintain financial stability, authorities in recipient countries will need to build capital and liquidity buffers in their financial systems and secure sources of emergency liquidity assistance.
Macroprudential policy should aim to limit systemic risks arising from the periodic accumulation of vulnerabilities. If sufficient capital and liquidity buffers have been built, they can be released to help shield economies from major shocks, such as the COVID-19 crisis. Reserves will need to be kept in order to provide emergency liquidity support, and a currency bloc, for example, will need to establish a contingent liquidity arrangement with the issuing central bank. For digital currency areas, similar arrangements with GSC issuers will be required.
5. For central banks issuing CBDC, they need to consider whether the spillover effects related to cross-border use of CBDC are consistent with their domestic policy goals.
In both Scenario 2 and Scenario 4, the issuing central bank needs to decide whether it is in the national interest to be the lender of last resort for countries that widely use CBDC. In implementing monetary policy, there are both benefits and costs. On the one hand, issuing central banks could benefit from the adoption of digital payments: widespread use of CBDC could in principle allow central banks to reduce policy rates below the effective lower bound, thereby enhancing the effectiveness of monetary policy in very low inflation environments (Bordo and Levine, 2018). On the other hand, if external demand for its currency causes its yield curve to approach the effective lower bound, then central banks will need to be innovative in expanding their monetary policy toolkit. Central banks could also consider the merits of implementing a tiered pay structure for CBDC, so that foreign demand for CBDC would be less disruptive to domestic monetary policy implementation (Bindseil, 2020).
B. Trading Limits and CFMs< /h3>
1. Some administrations may choose to restrict use in their own country Foreign CBDC and GSC.
This would happen earlier in Scenario 1 as the authorities try to minimize the risk of currency substitution. Or as an important part of the de-dollarization strategy in Scenario 2. Countries that have not yet liberalized their financial accounts for cross-border capital flows will have no choice but to restrict foreign CBDCs and GSCs if they are not prepared for the liberalization of capital flows brought about by the unrestricted use of foreign CBDCs and GFCs The level of liberalization of the use of capital flows. Even for countries with largely open financial accounts, CFM may still need to be viewed as helping to cope with shocks in certain circumstances, such as in the event of a surge in capital inflows or large capital flight near a crisis tool.
2. If national authorities wish to restrict the use of foreign CBDCs and GSCs, they need to assess the effective enforcement scope of restrictive measures.
Restrictive measures for domestic transactions include digital currency services related to resident entities. This restriction can range from strict licensing regulations all the way to a blanket ban on the service. In addition, (national authorities) could also impose restrictions on cross-border payments to mirror existing restrictions on current payment methods or capital transactions (i.e. CFMs), or to ensure export revenues are denominated in foreign fiat currencies. However, circumvention practices outside the regulated financial arena may reduce the effectiveness of such restrictive measures. For example, non-resident service providers can provide services directly to national residents via the Internet.
3. The effective implementation of restrictive measures on domestic and cross-border use of CBDC and GSC requires sufficient technical support .
Digital currencies should be designed to provide verification of the payer, payee, and purpose of payment. National authorities must ban this method of payment if it is not designed to meet the requirements of the restrictions. Deposit-based digital currencies can in principle meet these requirements, but there is some uncertainty as to whether token-based digital currencies can be encoded in a leak-proof manner under such strict constraints. On the positive side, CBDCs and GSCs are designed in principle to facilitate compliance, with restrictive measures built into the design or codified through smart contracts. For example, a payment transfer can be declined when the balance is insufficient or the relevant data requirements for a successful transaction are not met.
4. National authorities also need to assess whether restrictions on CBDC obligations under the Articles of Agreement).
As a foreign currency, as long as these payment methods support the use of other convertible currencies, it is prohibited (or restrictions) the use of foreign CBDCs in current international transactions would not trigger the foreign exchange restrictions set out in Item 8 of the Agreement. Furthermore, the appropriateness of institutional measures for the use of CBDCs for capital transactions depends on specific country conditions, as required by the Institutional Perspective on Liberalization and Capital Flow Management (IMF, 2012). Other international, regional and bilateral agreements (such as the OECD Code on the Liberalization of Capital Movements, WTO agreements or investment and free trade agreements) may also have other additional effects.
C. Legal Framework
1. The existing legal framework must be reviewed in various scenarios for the adoption of CBDCs and GSCs.
The issuance and widespread circulation of these new types of digital currency is likely to require a comprehensive understanding of currency, central bank, financing, contract , Property Law, Bankruptcy Liquidation and Tax Law etc. shall be amended. It is crucial that the above changes are adequately analyzed and planned for before the introduction and widespread use of these digital currencies. For receiving countries, the legal framework needs to be reviewed to determine how foreign CBDCs and GSCs are treated. If a highly permissive policy is chosen, the law can be rationalized. Of course, these modifications and changes need to be consistent with the foreign exchange control framework.
2. In all cases, strong Anti-Money Laundering and Combating the Financing of Terrorism (AML/ CFT) framework to reduce the risk of digital currencies becoming tools of criminal activity.
The key is to effectively implement the Financial Action Task Force (FATF) standard on AML/CFT , including its new standard for virtual assets. This includes in particular the establishment of frameworks for the authorization or registration of professionals dealing with virtual assets and risk monitoring. In addition, it includes measures to ensure that the traditional criminal law framework applies to virtual assets. While some AML/CFT measures, such as transaction surveillance, may be possible in DLT, others, such as verifying the identity of end users, can be challenging. Countries have broadly the same AML/CFT obligations regardless of whether specific assets are used in a cross-border context, but the intensity of AML/CFT measures and monitoring varies depending on the risk and cross-border use that may be required Take stronger measures.
3. CBDCs need to be carefully designed to ensure a robust and effective AML/CFT framework operate.
"Anti-money laundering/anti-terrorist financing" measures will be implemented by commercial banks involved in the design and promotion of CBDCs Joint implementation with other relevant service providers, while the implementation of the traditional "anti-money laundering/combating the financing of terrorism" framework will not change. However, for deposit-based CBDCs directly operated by the central bank, the central bank itself also needs to implement “anti-money laundering/anti-terrorist financing” measures including adequate customer due diligence, which requires it to adopt additional resources and professional capabilities. The cross-border use of CBDCs would further complicate the effective implementation of this framework.
4. GSCs service providers need to be licensed or registered and be effectively supervised.
GSCs and their proposed global network and service platform may be More person-to-person money transfers, leading to a shift in the virtual asset ecosystem, while GSCs could have serious consequences for AML/CFT measures. Therefore, the development and dissemination of GSCs requires monitoring and adaptation of regulatory countermeasures.
5. The "AML/CFT" framework needs to be revised, which is also critical for international cooperation .
Whether countries want to include virtual asset activities in the supervision of "anti-money laundering/anti-terrorist financing" Any scope or complete ban may require revisions to existing legal and institutional frameworks (e.g. designating agencies responsible for monitoring AML/CFT and/or sanctioning unauthorized activities). In the context of cross-border payments, dialogue between relevant authorities, especially AML/CFT financial regulators, is key to ensuring that regulatory loopholes are closed and regulatory abuses effectively combated.
D. Regulatory Policy
1. Adopting different proposals for CBDC and GSC will not change the basic principles of regulation, including the principle of technology neutrality, but will affect the strength of the regulatory approach.
In all cases, regulations need to be in place to maintain financial stability and ensure sound governance , payment infrastructure security and integrity, operational resilience, and consumer protection. Regulation also needs to consider the actual use and potential abuse of financial instruments and transactions, and their impact on the financial system, to support AML/CFT and maintain market integrity.
2. The competent authorities may need to tailor the Customized measures.
Since Scenario 1 has a relatively small impact on financial Significant changes in regulation. In Scenarios 2 and 4, borrowers and financial intermediaries are likely to experience greater currency mismatches and more exposure to foreign exchange market risks. Deposits in foreign CBDC may not be as liquid as conventional foreign exchange deposits. In Scenario 3, the main risk is maturity mismatch rather than currency mismatch, as financial institutions may use short-term liabilities to fund their long-term GSC-denominated assets. Given the risks posed by GSC-denominated funding, authorities may need to increase capital expenditures on GSC-denominated loans, raise their underwriting standards or impose other liquidity risk management standards.
3. The scope of regulation and the intensity of the oversight approach will need to consider how the GSC will affect existing financial intermediaries.
When allowing financial intermediaries to have GSC exposure on their balance sheets, even allowing their This is especially important when intermediating funds with GSC clients (for example, depending on the existing regulatory framework, banks and insurance companies may not be allowed to invest in digital instruments, especially across borders). The GSC's use of bank deposits as a reference asset also exacerbates interconnections with the financial system.
4. The Financial Stability Board (FSB) has developed a set of high-level principles for regulating GSCs.
FSB recommends that relevant agencies apply comprehensive regulatory requirements and relevant international standards to GSC arrangements. Authorities should cooperate and coordinate with each other domestically and internationally to facilitate effective communication and consultation to support each other in carrying out their respective responsibilities. In addition, authorities should ensure that GSC arrangements comply with all applicable regulatory requirements in a particular jurisdiction, including affirmative approval in jurisdictions with such mechanisms, before commencing any action in that jurisdiction.
5. The question remains to what extent the high level recommendations are sufficient.
At the same time, the FSB has also developed advanced recommendations to promote coordination and effective regulation of GSC, making these rules It is intended to accommodate the differing regulatory approaches of Member States and facilitate their efforts to adapt existing regulatory frameworks. For example, existing coordination mechanisms among regulators are currently sector-based. Extending this coordination mechanism across sectors will require further efforts by the different Standards Setting Bodies (SSBs) and their members. In order to solve these problems, the focus of the next step is to work together to formulate more detailed international principles or international standards to strengthen international consistency and curb the risk of arbitrage.
6. The GSC ecosystem may lack a traditional "home" regulator, making it difficult to achieve effective cross-border coordination .
GSC ecosystem may consist of loosely connected potential professional entities (e.g. issuers, custodians, authorized resellers, validators, and wallet service providers), and by design, there may not be a single governing body that controls an organization's element ecosystem. In principle, the regulator of the governing body (or institutions) would be the "home" regulator, but this can make it difficult to determine when governance agreements only cover certain elements and when the ecosystem is open. The rights and responsibilities of any such "home" director may also be difficult to determine. It may be necessary to identify the home/host at the level of each sub-entity (e.g. exchange or wallet provider) and clearly articulate the associated coordination arrangements.
7. Significant challenges remain in reaching a global consensus on how to regulate the GSC ecosystem.
An example is the difference in the way issuers are currently regulated: some authorities place emphasis on The potential applicability and extension of securities regulation to GSC, while other authorities are working to adjust the existing payment provider regulation and consider GSC as a kind of electronic currency. Sometimes, small adjustments can narrow the differences between different regulatory approaches, but unless more detailed international standards or guidance are agreed, there could be substantial gaps, inconsistencies and the potential for regulatory arbitrage. The emergence of globally harmonized regulations covering other service providers such as authorized resellers, exchanges and wallet service providers is equally challenging.
E. Structural Policy
1. The possibility of widespread adoption of GSCs raises questions about the welfare implications of issuing private currencies globally important question.
In both Scenarios 3 and 4, the recipient country may find itself effectively currency stance. GSC issuers may not be able to optimize interest rates or fees relative to receiving country needs when adjusting rates or fees: it is not clear whether issuing companies' goals are consistent with stabilizing land prices for the use of GSCs. Likewise, GSC issuers may not have sufficient incentives to implement robust governance and risk management, doubting which could lead to financial instability and erratic capital flows on a global scale. These potential problems may become even more acute when GSC issuers enjoy a global monopoly.
2. GSC issuers may not have sufficient incentives to practice sound governance and risk management, which may lead to financial Instability and instability of global capital flows.
When the GSC issuer enjoys a global monopoly, these potential problems can become serious. Policies that promote competition among platforms of Big Techs can help mitigate the risks posed by a lack of competition and uncertain governance of potential GSC issuers. Effective competition among currency issuers, including GSCs, can help alleviate the aforementioned conflict of interest issues and enhance currency stability in the long run (Hayek, 1976; Farhi and Maggiori, 2017). Two key options include stipulating user data portability and payment system interoperability requirements. In the absence of regulation, GSC issuers would have full control over users’ data, making it harder for other potential entrants to compete to provide data-driven financial services (Carriere-Swallow and Haksar, 2019 and 2020). This logic of controlling data as a barrier to entry has driven openness in the global banking industry, requiring established members of the financial market to share customer data with entrants. A similar approach could also be considered for payment services provided by big tech companies, both domestically and across borders. This will lower barriers to entry related to access to user data and cross-selling of financial services.
3. Also consider ways to facilitate payment network interoperability.
In principle, this would help eliminate network effects as a barrier to entry, as competitors could Tokens are offered on large tech platforms, including GSC, without the need to build their own independent network. This requires further consideration in terms of implementation, the areas of implementation, and how to balance the private interests of companies investing in building large networks with the public interest of more competition and stability. An important question is whether these types of requests can be enforced on cross-border networks and require international cooperation.
4. Protecting consumer rights is an important part of promoting competition among new payment service providers.
Many inexperienced consumers may use these new payment tools, especially for social Media related GSC, even for retail CBDC. Any significant use will require consideration of issues such as adequacy of disclosure, anti-fraud protections, applicability requirements, etc.
Conclusion< /h3>
1. With the acceleration of digitalization, the international financial landscape may be in a state of change.
The provision of payments and financial services is likely to become increasingly integrated with the digital economy through the Internet and mobile phones. Although digital technology can rapidly spread internationally and the rise of new forms of electronic money may lead to a more efficient and integrated global financial system, the effectiveness of monetary policy may be affected, and sovereign governments may have to use various policies tools to maintain monetary and financial stability, including fiscal, macroprudential policies, and CFM. This also includes a robust legal framework that plays a key role in giving this instrument official status as a legally acceptable means of payment and has a significant impact on its use.
2. This article The Bali Fintech Agenda is elaborated by focusing on the macro-financial impact of cross-border CBDC and GSC.
A key issue in the Bali Fintech Agenda (IMF 2018) is the need to balance the opportunities and risks of new electronic currencies. This paper shows that national authorities will likely face significant challenges in doing so. To illustrate these challenges, this paper presents several hypothetical and stylized scenarios for the adoption of CBDCs and GSCs, analyzes their macro-financial consequences, and discusses policy implications. This paper finds that the adoption and use of CBDCs and GSCs is scenario-specific. Overall, the paper finds that CBDCs do not substantially alter the economic forces that lead to currency internationalization, but they can strengthen the incentives for currency substitution and currency internationalization. GSCs that do not represent an independent measure of value are similar to CBDCs in terms of monetary effects, but may affect financial stability as they may suffer from rounds of crises of confidence. A GSC representing a new independent scale of value could have more fundamental implications for global monetary and financial stability.
3. For countries adopting foreign CBDC and/or GSC, the main challenge is how to improve cross-border payment efficiency and Maintain macroeconomic and financial stability with better access to international capital markets.
This balance may vary from country to country, depending on the pattern of business cycle synchronization. Also important is the availability of fiscal policy space and other stabilizing instruments. For countries whose economic activities are closely integrated with those of the CBDC issuing country, macroeconomic stability does not necessarily require an independent monetary policy. For countries with greater fiscal space, capital, and liquidity buffers in the financial system, fiscal policy and macroprudential policies can play a greater role in mitigating shocks, bringing the benefits of monetary independence to financial integration. The interests that come are tilted.
4. For countries adopting GSC issued by large technology platforms, they will be very concerned about ensuring that GSC arrangements have sound governance and risk management .
They will need to put mechanisms in place to ensure that the profit-maximizing objectives of GSC issuers do not jeopardize monetary and financial stability. Policies that promote competition among large tech platforms and interoperability between different types of GSCs could help alleviate some of these concerns, but further work is needed.
5. Countries issuing CBDC need to carefully consider the costs and benefits of allowing non-residents to use their CBDC.
The use of nonresidents can help companies and households in the issuing country to better manage risk (for example, by issuing debt denominated in their own currency) and increase the breadth and depth of the issuing country's financial markets. However, to the extent that they have increased financial integration before financial development has reached a relatively advanced stage, this may increase exposure to global shocks. Globally, monetary competition due to the rise of CBDCs and GSCs and the emergence of new types of safe assets may lead to improved risk-sharing options in the long run, but may also make policy coordination more difficult in the short run.
6. It is necessary to further analyze the impact of the emergence of CBDC and GSC on IMF.
The issuance and cross-border use of CBDC has important spillover effects in IMF member countries. With its broad membership and mandate to maintain international monetary and financial stability, the IMF's unique position to influence bilateral and multilateral surveillance and capacity development can be considered. Questions arose about the IMF's role in enhancing cross-border payments and promoting the safety and soundness of cross-border developing countries and the GCC in terms of its services to its members. These issues require further research by staff and discussions with other relevant stakeholders. Ongoing and planned analytical and policy work by staff focuses on benefits and risks for developing countries; data policy frameworks; regulation of stablecoin issuers and service providers; and the role of digital currencies in promoting financial inclusion and vice versa role in the macroeconomic impacts of the CBDC; and legal issues related to the rise of CBDCs and GSCs.
Appendix 1 : Current status of currency cross-border use
1. International transactions have always been dominated by US dollars. Although the U.S. accounts for only 10% of global trade and 15% of global GDP, the U.S. dollar is the currency in which 50% of global trade is invoiced.
Two-thirds of global securities issuance is denominated in US dollars, emerging markets and developing countries75 % of cross-border bank claims and government bonds are denominated in dollars, which account for about two-thirds of official foreign exchange reserves, while about 45% of foreign exchange transactions involve the dollar. (Graph A1 shows various indicators using international currencies).
2. In some countries, the US dollar is also widely used for domestic transactions. The situation where a foreign currency replaces the domestic currency is called currency substitution.
This can be used as a policy choice when national authorities choose to grant domestic legal tender status to foreign currencies ( For example in Ecuador, Kosovo and Liberia). In addition, in many countries, regardless of the purpose of the authorities, foreign exchange has actually partially or completely replaced domestic currency in the payment system or financial sector. These countries are often referred to as (partially) "dollarized". Currency substitution often occurs against a backdrop of weak domestic macroeconomic policies and a lack of trust in policy institutions. Annex II provides typical facts about the extent, dynamics, and persistence of currency substitution, as well as a discussion of their drivers.
3. Cross-border payment infrastructure supports global currency usage.
Because the parties to the transaction are located in different geographical locations, cross-border payments are usually transferred with deposit balances form, these deposit balances are held by banks linked through correspondent banking relationships. Correspondent banking is an arrangement in which one bank (correspondent bank) holds deposits with other banks (correspondent banks) and provides payment and other services to those banks. The global correspondent banking network is a multi-layered clearing and settlement system that is influenced not only by existing payment technologies, but also by legal and regulatory requirements and constraints. There has been a broad setback in cross-border correspondent banking relationships over the past decade, although some countries have been more affected than others (IMF, 2017; Rice et al., 2020). The withdrawal of correspondent banking relationships clearly reflects increased costs associated with stricter AML/CFT requirements.
4. Cross-border payments have high transaction costs, especially at the retail level.
Factors behind these costs include fragmented data standards, enforcement of AML/CFT (AML/CFT) Complexity of compliance checks, limited working hours, outdated legacy platforms, high capital costs, long transaction chains, and weak competition. This friction results in high fees, low speed, and low transparency for cross-border payments. Global regulators are increasingly focusing on these issues (e.g. He and others, 2017; CPMI, 2018). The Financial Stability Board is working to coordinate globally on actions to improve the efficiency of cross-border payments, partly in response to the rise of GSCs as a solution to removing friction from cross-border payments (CPMI, 2020; FSB 2020b and 2020c).
Appendix II: Degree and Dynamics of Currency Substitution
1. How to present currency substitution depends on how a foreign currency can compare with local currency Play better currency functions. Households and firms prefer to hold financial assets and liabilities denominated in foreign currencies when the domestic currency is a poor store of value.
This is the most common form of currency substitution and usually includes domestic bank deposits (Bannister et al. 2018). If banks lend foreign currency deposits, this leads further to foreign currency-denominated credit, implying a significant correlation between the degree of currency substitution in terms of deposits or loans (Graph A2). Figure B). Conversely, if a foreign currency's appeal stems from its value as a medium of exchange, currency substitution tends to focus on payment systems. For example, in Cambodia, currency substitution was initially mediated by the exchange function (Odajima, 2017). In the real economy, this currency substitution sees local wages and prices set in foreign currency. Therefore, the widespread use of foreign currency as a medium of exchange also implies the use of foreign currency as a measure of value. In some cases, however, the measure of value function in the form of wage or price indexation can substitute for the use of foreign currency as a medium of exchange (Kokenyne et al., 2010).
2. Although most countries in the world have low levels of currency substitution, nearly one-third of countries have currency substitution of more than 30% of deposits/loans (Figure A2, Panel A).
This is based on a sample of 154(149) countries, these The country reports data on foreign exchange deposits (loans) and total deposits (loans). In 17 percent of countries, foreign exchange use accounted for more than half of total deposits and in 11 percent of countries, more than half of total loans. Countries with a high level of currency substitution are all emerging or developing economies.
3. Currency substitution can occur rapidly, and once entrenched, domestic use of foreign currencies tends to be highly persistent.
Following an economic crisis or a major political transition, foreign currency adoption can be rapid. A dynamic chart based on the experience of 25 countries that have experienced currency substitution events highlights that a rapid emergence of foreign currency use can be seen in countries with initially restricted access to foreign currency, with foreign currency deposits rising from single digits to 100% in bank deposits on average over two years More than 30% of the total amount. Habit formation among households and firms often ensues after a currency substitution event. Foreign exchange becomes a carrier of trust, providing insurance against the recurrence of macroeconomic instability, which means a high degree of persistence of currency substitution. In the chart, for all countries that experienced currency substitution events, the level of foreign exchange use at the end of the decade remains higher than at the beginning, and the average degree of foreign exchange use plateaus rather than recovers.
This assumption is premised on the fact that assets denominated in foreign currencies are legal in China's financial system. Otherwise, currency substitution may take the form of physical reserves or capital outflows.
This dataset contains two countries (Ecuador, El Salvador) where foreign currency is the only legal tender, and two countries where both domestic and foreign currencies are legal tender (Liberia , Panama), and one country where a foreign currency was legal tender during the sample period but is no longer legal tender (Zimbabwe).
This article is from a contribution and does not represent the opinion of Rhythm BlockBeats
Welcome to join the official BlockBeats community:
Telegram Subscription Group: https://t.me/theblockbeats
Telegram Discussion Group: https://t.me/BlockBeats_App
Official Twitter Account: https://twitter.com/BlockBeatsAsia
Related Articles
