Stablecoin Liquidity and U.S. Monetary Policy Transmission

The rapid growth of stablecoins has raised concerns about their implications for monetary policy transmission. As stablecoins increasingly function similarly to money, their growing importance may affect how monetary policy influences financial markets and the real economy. This study examines whether stablecoin liquidity alters monetary policy transmission in the United States.Using a local projection framework, the study estimates the dynamic responses of macroeconomic and financial variables to monetary policy shocks under varying stablecoin liquidity conditions. The analysis uses the monetary policy shock series of (Bu, C., Rogers, J. H., & Wu, W. (2021). A unified measure of fed monetary policy shocks. Journal of Monetary Economics, 118, 331–349. https://doi.org/10.1016/j.jmoneco.2020.11.002) and circulating liquidity data for USDT and USDC from January 2020 to December 2023. The results show that monetary policy shocks generate conventional transmission responses, with the strongest and most persistent effects on interest rates. Higher stablecoin liquidity amplifies the decline in interest rates following an expansionary monetary policy shock, particularly at the short-term interest rates.These findings suggest that stablecoins amplify existing financial transmission mechanisms rather than constitute an independent monetary policy transmission channel. This study highlights the importance of considering stablecoin liquidity when assessing monetary policy transmission and financial conditions.