Repo Rate Dynamics: The Role of Dealers, Hedge Funds, and Issuance

This paper studies how dollar stablecoins affect parallel foreign-exchange markets in economies with fixed or heavily managed exchange rates. When foreign currency is rationed, the true degree of exchange-rate misalignment is not directly observed. Traditional parallel markets reveal it only imperfectly because information is dispersed across bilateral and often private trading opportunities. Stablecoins make dollar-like claims easier to access outside the official allocation system, but they also create a visible, high-frequency price that aggregates order flow in a common venue. I develop a global-games model in which households observe dispersed private signals about misalignment, while stablecoin market depth determines the precision of a common public signal. Stablecoins generate a state-dependent welfare effect. They expand access to foreign-currency and can improve allocation by making beliefs about misalignment more informative, but the same public price can also coordinate runs by making beliefs and actions more synchronized. When misalignment is low, access and allocation gains dominate, so stablecoins raise welfare. When misalignment is high, the coordination externality becomes more costly: a more precise public signal compresses belief dispersion, strengthens coordinated exit incentives, and can overturn the access benefit. This points to a state-contingent approach that preserves low-cost access in normal states while using temporary, targeted measures to manage large or run-like flows when misalignment is high.