Digital dollar puts local currencies at risk in poor countries: Raghuram Rajan

Raghuram Rajan has served as the Chief Economist of the IMF.

According to former Indian central bank governor Raghuram Rajan, the introduction of a digital US dollar could help democratize banking in poor countries, but it also poses risks to local currencies.

Greenback’s easy-to-use electronic version could prompt people in low-income countries to use dollars for day-to-day transactions, something that is difficult today because of the need for physical bills. According to Rajan’s argument, this can effectively drive out the local currency in countries where there is a low level of confidence in macroeconomic policy.

“It means that country no longer has monetary sovereignty,” Rajan, who previously also served as the IMF’s chief economist, said in a Bloomberg TV interview with David Westin on Wednesday. “It has fewer tools to deal with economic growth.”

Rajan’s remarks come as the Federal Reserve is preparing to issue a paper on digital currencies soon. The US central bank has not made a decision on whether to issue a digital dollar, but Chair Jerome Powell has favored a sluggish approach, in contrast to China, which is already testing the use of the digital yuan.

Rajan, now a professor at the University of Chicago Booth School of Business, signaled support for the Fed’s caution. He said on private sector actors, this is not the place for the central bank to be a major innovator.

He also downplayed any risk to the dollar’s reserve position from others moving to introduce the digital currency beyond the US, adding that there are other reasons for the dollar’s underlying position, he said, including the US’s deep-seated position. financial markets and the rule of law.

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