Abstract
The paper aims to assess, from an empirical viewpoint, the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we first find the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others. We then look at how the stability of either stablecoin is affected by currency shocks by means of spillover networks built on VAR models. Our empirical findings show that our basket based stablecoin is less volatile than all single currencies. This result is fundamental for policy making, and especially for emerging markets with a high level of remittances: a Librae (basket based stablecoin) can preserve their value during turbolent times better than a Libra (single currency based stablecoin).
Highlights
Carney (2019) posed the question of whether a Synthetic Hegemonic Currency (SHC) would be best provided by the public sector
An SHC could dampen the dominating influence of the US dollar on global trade, it could alleviate spillovers to exchange rates from shocks to the US economy, and trade across countries could become less dependent on the dollar
We investigate the consequences of a global SHC (”Librae”, in a literal sense), regardless of whether issued by a private company such as Facebook, or by a central bank
Summary
Carney (2019) posed the question of whether a Synthetic Hegemonic Currency (SHC) would be best provided by the public sector. The rationale would be that a global currency, underpinned by a basket of reserve assets, could better support global outcomes. An SHC could dampen the dominating influence of the US dollar on global trade, it could alleviate spillovers to exchange rates from shocks to the US economy, and trade across countries could become less dependent on the dollar. This is not the first time that the idea of global currency has been floated publicly. Others have argued in favour of retaining major currencies but with a tighter exchange rate policy among them (Williamson, 1993; McKinnon et al, 1984). In maintaining the status quo as suggested by Rogoff (2001)
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