The external financial spillovers of CBDCs

Alessandro Moro () and Valerio Nispi Landi

No 1416, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Using a DSGE model, we study the macroeconomic consequences of a foreign central bank digital currency (CBDC) being available to residents in a small open economy. We find that a gradual and permanent increase in domestic households' preference for a foreign CBDC leads to a structural reduction in economic activity, especially when the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can help smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than CPI targeting or an exchange-rate peg. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt if the CBDC remuneration remains constant.

Keywords: central bank digital currency; DSGE model; open economy macroeconomics; financial globalization (search for similar items in EconPapers)
JEL-codes: E44 E58 F38 F41 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-ifn, nep-mon, nep-opm and nep-pay
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Journal Article: The external financial spillovers of CBDCs (2024)
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