Monetary Transmission & Small Firm Credit Rationing: The Stablecoin Opportunity to Raise Business Credit Flows

Abstract

Credit rationing, especially prevalent for smaller firms, impedes economic growth. A central bank-aligned not-for-profit managed business-to-business “stablecoin” (“synthetic central bank digital currency”) providing trade credit liquidity can provide additional monetary mass to mitigate small firm credit rationing. This raises growth by reducing monetary transmission imperfections consequent upon asymmetric information, commercial bank underwriting restrictions, market power dynamics, and regulatory distortion. A simple framework is developed to contextualise small firm credit rationing and associated monetary transmission imperfections with broader credit flows into both the real and monetary sectors. Evidence is presented regarding monetary transmission efficacy to firms, paving the way to proposing a business-to-business central bank-mediated “trade credit stablecoin” to improve business credit supply. In addition to providing additional (estimated at more than 10%) industrial and commercial (including smaller) firm financing, the envisaged trade credit stablecoin provides an additional monetary transmission channel for central banks to manage credit supply to the real economy to support economic activity and raise growth. Available to all firms, the trade credit stablecoin offers additional low-cost liquidity to firms, thereby offering policymakers an additional contra-cyclical monetary transmission instrument to support growth and, where necessary, reduce real economic disruption consequent upon financial system crises and liquidity events.