Interest-bearing Retail CBDC in a Small Open Economy: Implications for Welfare and the Macroeconomic Trilemma

39 Pages Posted: 26 May 2020 Last revised: 14 Sep 2022

See all articles by Ammu George

Ammu George

National University of Singapore (NUS) - Asia Competitiveness Institute

Taojun Xie

National University of Singapore (NUS) - Asia Competitiveness Institute

Joseph D. Alba

Nanyang Technological University

Date Written: August 15, 2022

Abstract

We introduce an interest-bearing retail central bank digital currency (CBDC) as a second monetary policy instrument to a New Keynesian small open economy model and analyze its welfare and economic implications. Our simulations find that a counter-cyclical CBDC interest rate or quantity rule enhances social welfare and economic stability. When used only domestically, an interest-bearing CBDC presents a possibility to overcome the macroeconomic trilemma: The interest rate on bonds effectively stabilizes the exchange rate movements via the uncovered interest parity, while the CBDC interest rate targets domestic inflation.

Keywords: central bank digital currency, monetary policy, blockchain, distributed ledger, small open economy, monetary policy trilemma

JEL Classification: E4, E5, F3, F4

Suggested Citation

George, Ammu and Xie, Taojun and Alba, Joseph Dennis A., Interest-bearing Retail CBDC in a Small Open Economy: Implications for Welfare and the Macroeconomic Trilemma (August 15, 2022). Available at SSRN: https://ssrn.com/abstract=3605918 or http://dx.doi.org/10.2139/ssrn.3605918

Ammu George

National University of Singapore (NUS) - Asia Competitiveness Institute ( email )

469C Bukit Timah Road
Level 3, Wing A
259772
Singapore

Taojun Xie (Contact Author)

National University of Singapore (NUS) - Asia Competitiveness Institute ( email )

469C Bukit Timah Road
Level 3, Wing A
259772
Singapore

Joseph Dennis A. Alba

Nanyang Technological University ( email )

School of Social Sciences
48 Nanyang Avenue
Singapore, 639818
Singapore

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