The impact of central bank digital currency on macroeconomic dynamics: A DSGE analysis

Lijin Xiang, Chao Feng, Zumian Xiao and Jianjian Liu

Economic Modelling, 2024, vol. 141, issue C

Abstract: This study investigates the impact of Central Bank Digital Currency (CBDC) on macroeconomic fluctuations under various external shocks, expanding the research on macroeconomic effects of CBDC issuance. We develop a dynamic stochastic general equilibrium (DSGE) model to examine the effects of different external shocks on the macroeconomy under three scenarios with varying CBDC rules. Our analysis reveals that, in the presence of CBDC, macroeconomic variables are generally more volatile after exogenous shocks than in the absence of CBDC, while highlighting the crucial role of monetary policy in stabilizing the macroeconomy. Liquidity and substitution effects are identified as main drivers of the results. These findings offer new insights into the welfare improving effect of interest-bearing CBDC, carrying significant implications for the effective implementation of monetary policy.

Keywords: Central bank digital currency; Dynamic stochastic general equilibrium; Economic fluctuations; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002876

DOI: 10.1016/j.econmod.2024.106930

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