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Central bank digital currency and informal economy

Eun Young Oh and Shuonan Zhang
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Eun Young Oh: University of Portsmouth

No 2020-11, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: The central bank digital currency (CBDC) attracts discussions on its merits and risks but much less attention is paid to the adoption of a CBDC. In this paper, we show that the CBDC may not be widely accepted in the presence of a sizeable informal economy. Based on a two-sector monetary model, we show an L-shaped relationship between the informal economy and CBDC. The CBDC can formalize the informal economy but this effect becomes marginally significant in countries with significantly large informal economies. In order to promote CBDC adoption and improve its effectiveness, tax reduction and the positive CBDC interest rate can be useful tools. We further show that CBDC policy rate adjustment triggers a reallocation effect between formal and informal sectors, through which improves the effectiveness of both conventional monetary policy and fiscal policy.

Keywords: Central Bank Digital Currency; Informal Economy; Quantitative Analysis (search for similar items in EconPapers)
JEL-codes: E26 E40 E42 E58 (search for similar items in EconPapers)
Pages: 27
Date: 2020-07-21
New Economics Papers: this item is included in nep-cba, nep-iue, nep-mac, nep-mon, nep-ore and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:pbs:ecofin:2020-11

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