Open-Economy LOLR in the Age of Stablecoins: FX-Mismatch Runs and Cross-Border Redemption Spirals

Classic open-economy LOLR analysis (e.g., Bocola and Lorenzoni 2017) and wholesale run models (Gertler, Kiyotaki, and Prestipino 2016) largely predate the scale of stablecoins and crypto on/off-ramps. Meanwhile, Saleem et al. (2024) document growing ties between crypto capitalization and traditional financial indicators. This project models a new run mechanism: when domestic banks face stress, large depositors can shift funds into USD-pegged stablecoins or offshore exchanges, instantly creating FX demand that domestic LOLR facilities (in local currency) cannot meet. The central bank’s ability to stop the run now hinges on its USD swap-line capacity and the microstructure of crypto liquidity. The novelty is to treat stablecoin redemption as a cross-border, always-on “escape valve” that amplifies open-economy runs via FX mismatches—a channel absent in current LOLR frameworks. Empirically, combine stablecoin flow data, FX basis measures, and bank-level funding metrics to test whether crypto redemption spikes predict FX stress and deposit outflows at banks with dollar liabilities or tech-heavy depositors (Allen 2023). Policy-wise, this speaks to swap-line design, prudential rules for banks servicing crypto rails, and coordination between monetary authorities and crypto market infrastructures.

References:

1. Financial Crises and Lending of Last Resort in Open Economies. Luigi Bocola, G. Lorenzoni (2017).
2. Interest Rates, Venture Capital, and Financial Stability. Hilary J. Allen (2023). Social Science Research Network.
3. Decrypting Cryptocurrencies: An Exploration of the Impact on Financial Stability. Mohamed Nihal Saleem, Yianni Doumenis, Epameinondas Katsikas, Javad Izadi, Dimitrios N. Koufopoulos (2024). Journal of Risk and Financial Management.
4. Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises. M. Gertler, N. Kiyotaki, Andrea Prestipino (2016).