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The endogeneity of money supply through the lens of circulating cryptoassets and the issue of digital currency of the Central Bank

Vol. 25, Iss. 7, JULY 2019

Received: 18 June 2019

Received in revised form: 2 July 2019

Accepted: 16 July 2019

Available online: 1 August 2019

Subject Heading: Banking

JEL Classification: E12, E42, E51, E58, G21

Pages: 1472–1483

Lunyakov O.V. Financial University under Government of Russian Federation, Moscow, Russian Federation

Subject The article reviews consequences that may affect the banking sector after the central bank introduces the digital currency and develops the market of cryptoassets.
Objectives The study formalizes possible changes in the banking sector’s capabilities for expanding the money supply.
Methods Illustrating the three-sector model of economy, I analyze changes in the balance of financial assets and liabilities of macroeconomic agents, considering the circulation of cryptoassets. Subsequently, the digital currency of the central bank is integrated into the domestic economy model as an innovative payment mechanism, implying two scenarios, i.e. without the accrual of interests on the balance with the central bank and with such an accrual.
Results Private tokens, including cryptocurrencies, open up new horizons for diversifying savings. They ares likely to have no significant effect on the endogeneity of money supply, since savings remain rather volatile. On the other hand, the issue of the central bank’s digital currency can considerably influence the extent of lending and deposit practices, challenging the liquidity and growth in the cost of funding for credit institutions.
Conclusions and Relevance Issuing the digital currency and accruing interests on the balance, the central bank forges a new mechanism for monetary regulation. In the mean time, the banking sector may face the liquidity challenge and rise in the cost of funding, which may curb lending programs and limit the endogenous issue of money. The findings unfold fundamental principles of the modern theory of money. The scenarios analyzed herein can be used by monetary authorities to substantiate their decisions on the financial market regulations.

Keywords: endogenous money supply, banking sector, cryptoassets, token, digital currency


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