Central Bank Digital Currency, Tax Evasion, and Monetary Policy with Heterogeneous Agents

Adib Rahman () and Liang Wang ()
Additional contact information
Adib Rahman: University of Hawaii
Liang Wang: University of Hawaii

No 202505, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We investigate the effects of central bank digital currency (CBDC) issuance in an economy where individuals can evade taxes by using cash. Our tractable model features agent heterogeneity with unobservable idiosyncratic shocks and voluntary exchange, where CBDC and cash compete as payment methods. CBDC's transparency enables governments to collect a labor tax that proves non-distortionary in our quasi-linear environment. Agents with higher marginal utility voluntarily pay fixed fees to access interest-bearing CBDC when their debt constraints bind, allowing the implementation of optimal policy with strictly positive inflation and nominal interest rates. We demonstrate how CBDC enables redistribution between agent types that is not possible in cash-only economies. We conjecture that an optimal CBDC policy involves higher nominal interest rates and lower inflation compared to cash regimes. By reducing tax evasion incentives, the introduction of CBDC can increase both output and aggregate welfare.

Keywords: Cash; CBDC; Labor Tax; Tax Evasion; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E42 E58 H21 H26 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-fdg, nep-iue, nep-mon, nep-pbe and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.economics.hawaii.edu/research/workingpapers/WP_25-05.pdf First version, 2025 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hai:wpaper:202505

Ordering information: This working paper can be ordered from
http://www.economics ... esearch/working.html

Access Statistics for this paper

More papers in Working Papers from University of Hawaii at Manoa, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Web Technician ().