CBDC Policies in Open Economies

Michael Kumhof, Marco Pinchetti, Phurichai Rungcharoenkitkul and Andrej Sokol

No 205, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP.

Keywords: Central bank digital currencies; Monetary policy; Bank deposits; Bank loans; Monetary frictions; Money demand; Money supply; Credit creation (search for similar items in EconPapers)
JEL-codes: E41 E42 E43 E44 E52 E58 F41 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: CBDC policies in open economies (2023)
Working Paper: CBDC Policies in Open Economies (2023)
Working Paper: CBDC Policies in Open Economies (2023)
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