Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis

Baogui Xin and Kai Jiang

Research in International Business and Finance, 2023, vol. 64, issue C

Abstract: Implementing a negative interest rate policy (NIRP) in the traditional fiat system is less effective than desired because of the zero lower bound (ZLB) constraint on interest rates and the cash barrier. Would this problem be solved if a new form of currency was introduced, i.e., central bank digital currency (CBDC), in the economy? To answer this question, we construct a dynamic stochastic general equilibrium (DSGE) model to analyze the effectiveness of NIRP upon the introduction of CBDC. The results suggest that: (i) The CBDC can eliminate the ZLB constraint and stabilize the economic fluctuations caused by NIRP. (ii) The central bank can implement NIRP by directly adjusting the interest rate of digital currency to stimulate consumption, investment, and output and to accelerate macroeconomic recovery. (iii) Welfare analysis shows that the central bank can effectively choose different NIRP rules according to the economic objectives.

Keywords: Central bank digital currency (CBDC); Negative interest rate policy (NIRP); Zero lower bound (ZLB); Dynamic stochastic general equilibrium (DSGE) (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:64:y:2023:i:c:s0275531923000272

DOI: 10.1016/j.ribaf.2023.101901

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