Forecasting macroeconomic effects of stablecoin adoption: A Bayesian approach

• Published in: Economic modelling 2022-04, Vol.109, p.105792, Article 105792
• Main Authors: Bojaj, Martin M., Muhadinovic, Milica, Bracanovic, Andrej, Mihailovic, Andrej, Radulovic, Mladen, Jolicic, Ivan, Milosevic, Igor, Milacic, Veselin
• Format: Article
• Language: English
• Subjects: Bitcoin; Connectedness; Forecast; Macroeconometrics; Policy objective; Stablecoin adoption
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2022.105792

This study analyzes the effect of stablecoin adoption on key macroeconomic factors in Montenegro. The main explanation for the adoption of stablecoins is their one-to-one peg to various currencies and commodities. Previous studies have relied on the relationships among cryptocurrencies and thus could not disentangle the country-level macroeconomic effects of stablecoins from the effects of other cryptocurrencies. Using data from January 2006 to December 2019, we decompose the correlation between cryptocurrencies and their effects on the economy due to (a) shocks to stablecoins and (b) shocks to Bitcoin. Contrary to assumptions, stablecoins do not maintain their peg in “crash times” but do promote economic growth. Bitcoin's volatility deanchors investor expectations, disrupts markets, and destabilizes key macroeconomic factors. Our novel findings indicate that stablecoin adoption should not be based only on a one-to-one assumption and reveal the mechanism of key gaps by a prudential authority. •The study analyzes the effect of stablecoin adoption on key macroeconomic factors.•We decompose the effect of stablecoin and Bitcoin shocks to the economy.•Stablecoins cannot maintain their peg in “crash times” but can promote growth.•Bitcoin's volatility deanchors investors' expectations and destabilizes economies.•Stablecoin adoption should not be based only on a one-to-one assumption.