Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting

King Yoong Lim, Chunping Liu and Shuonan Zhang

Emerging Markets Review, 2024, vol. 59, issue C

Abstract: We develop a DSGE model with cash deposits and digital currencies to study the economic stability of two potential central banking policies in China, a Loan Prime Rate (LPR) policy function and central bank digital currency (CBDC) implementation. We Bayesian-estimate both a benchmark model and a “Post-CBDC world”. In the post-CBDC world, although the introduction of CBDC appears to deepen the procyclicality of macroeconomic variables to real shocks, a potential LPR-setting policy appears to have some degree of policy complementarity with CBDC to mitigate this. We also uncover an optimal policy combination of the LPR rule and Taylor-style CBDC rule.

Keywords: China; Digital currency; Loan prime rate; Monetary policy; Bayesian DSGE models (search for similar items in EconPapers)
JEL-codes: C11 E4 E52 E58 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Optimal Central Banking Policies: Envisioning the Post-Digital Yuan Economy with Loan Prime Rate-setting (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000037

DOI: 10.1016/j.ememar.2024.101108

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