Central bank digital currency: A review and some macro-financial implications

Hongyi Chen and Pierre Siklos

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Central Bank Digital Currency (CBDC) has attracted considerable interest and its deployment on a global scale is imminent. However, digital currencies face several challenges. They include: legal, technological, and political considerations. We summarize those challenges and add a few more that have not received much attention in the literature. We then consider two forms of CBDC: a narrow version that only replaces notes and coins and a broader form with a deposit feature. The narrow CBDC is the most likely one to be first introduced. Next, relying on evidence of past episodes of financial innovation, and using cross-country data, we explore the hypothetical impact of CBDC on inflation and financial stability, based on the historical behaviour of the velocity of circulation and incorporating a CBDC’s impact in McCallum’s policy rule which defines the stance of monetary policy based on money growth. Our simulations suggest that CBDC need not produce higher inflation, but financial stability remains at risk. We provide some policy implications.

Keywords: Central Bank Digital Currency; Velocity; Money Demand; Monetary Policy; McCallum Rule (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 E52 O31 O33 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon, nep-opm and nep-pay
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Citations: View citations in EconPapers (22)

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Journal Article: Central bank digital currency: A review and some macro-financial implications (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-12

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