Working Paper: CEPR ID: DP15335
Authors: Arnaud Mehl; Livio Stracca; Massimo Ferrari
Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC). We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies.
Keywords: central bank digital currency; DSGE model; openeconomy; optimal monetary policy; international monetary system
JEL Codes: E50; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CBDC (E42) | international spillovers of monetary policy and technology shocks (F42) |
| CBDC design features (E58) | magnitude of spillovers (F69) |
| CBDC (E42) | arbitrage condition linking interest rates, exchange rates, and remuneration (F31) |
| arbitrage condition linking interest rates, exchange rates, and remuneration (F31) | larger exchange rate movements (F31) |
| CBDC remuneration (E42) | risk-free rate in foreign economy (G15) |
| risk-free rate in foreign economy (G15) | tighter financial conditions (E44) |
| tighter financial conditions (E44) | adverse effects on real consumption and investment (E20) |
| CBDC (E42) | reduced monetary policy autonomy in foreign economies (E58) |
| reduced monetary policy autonomy in foreign economies (E58) | adjustments in foreign monetary policy (F33) |