A Macroeconomic Model of Central Bank Digital Currency

RePEc Short ID: pwu111
ORCID iD: 0000-0003-4239-1233

Paul, Pascal; Ulate, Mauricio; Wu, Jing Cynthia

doi:10.24148/wp2024-11

Working Paper

A Macroeconomic Model of Central Bank Digital Currency

Abstract: We develop a quantitative New Keynesian DSGE model with monopolistic banks to study the macroeconomic effects of introducing a central bank digital currency (CBDC). Households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed, while bank profitability and lending decline. We assess this trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%.

JEL Classification: E3; E4; E5; G21; G51;

https://doi.org/10.24148/wp2024-11