DeFi-ying the Fed? Monetary Policy Transmission to Stablecoin Rates
Journal
SSRN Electronic Journal
ISSN
1556-5068
Type
working paper
Date Issued
2025-02-27
Author(s)
Abstract
Does the Federal Reserve's monetary policy influence stablecoins pegged to the US dollar? Major stablecoin issuers do not offer interest, but investors can lend stablecoins through Decentralized Finance (DeFi) lending protocols, where interest rates are governed by predetermined rules enforced by smart contracts. We first document a significant disconnect between conventional short-term interest rates and stablecoin lending rates. We then develop a model of DeFi lending to identify factors explaining this disconnect and the potential limits to the smooth transmission of monetary policy to these stablecoin lending rates. Finally, we empirically test the model's predictions and find that, after accounting for the specific determinants of DeFi lending rates, the Federal Reserve's monetary policy does indeed affect stablecoin lending rates but does not explain a large fraction of their fluctuations.
Language
English (United States)
Keywords
G14
G23
G29
Publisher
Elsevier BV
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ssrn-4673325.pdf
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Format
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