The impact of digital money on monetary and fiscal policy

Abstract

Digital money era is in full swing. It has already changed the structure of the global monetary system. Like industrial revolutions of the past few centuries, the digital money revolution is based on: (i) new IT and accounting technology (crypto algorithms, distributed ledger technology, internet, and deep penetration of smart phones), and (ii) demand for greater financial inclusion, and for more efficient financial services. The advent of unregulated private mobile money with more than 4 billion users and trillions of dollars in financial transaction has awakened fears of monetary system instability and dwindling traction of the old monetary and fiscal policy. The response has been a relentless effort by more than 100 central banks around the world to develop a public digital currency. Retail CBDCs issued by central banks will be available to everybody to provide stability and liquidity to the financial system in times of need. There will be uncertainties and challenges regarding the conduct of monetary and fiscal policy. Many expected improvements will come with inevitable tradeoffs in the speed and effectiveness of monetary policy transmission, and in achieving greater fiscal transparency without violating individual rights and privacy. Serbia will benefit greatly from improved fiscal transparency and reduced shadow economy associated with digital money revolution. At the same time it will be vulnerable to currency substitution pressures from future digital Euro and reduced traction of monetary policy in the presence of multiple e-money flows. Timely legal preparations for bank-led mobile money and Central Bank digital cash, and applied research of complex future policy risks is strongly advised.