Central Bank Digital Currency with Adjustable Interest Rate in Small Open Economies

53 Pages Posted: 26 May 2020 Last revised: 27 May 2020

See all articles by Ammu George

Ammu George

Nanyang Technological University (NTU)

Taojun Xie

National University of Singapore (NUS) - Asia Competitiveness Institute

Joseph D. Alba

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: May 20, 2020

Abstract

We examine the economic consequences of an interest-bearing design of the Central-Bank Digital Currency (CBDC), and extend the discussion to an open-economy context with trade and capital flows. We use a dynamic stochastic general equilibrium (DSGE) model to simulate a baseline scenario with only a primary monetary policy rule, and two counter-factual scenarios with a primary monetary rule together with a secondary CBDC rule associated with adjustable interest-bearing CBDC — the price rule or the quantity rule. Our simulations show that 1) CBDC with an adjustable interest rate is welfare-improving; 2) a quantity rule delivers the best welfare outcome for society, but with uneven distributional effects between households and financial investors; 3) exchange rate movements and inflation are more stable with the adjustable interest rate; 4) imperfect substitutability between CBDC and bank deposits is the key for the effectiveness of using the CBDC as a secondary monetary policy instrument.

Keywords: CBDC, DSGE, monetary policy, cash, blockchain, distributed ledger

JEL Classification: E41, E42, E43, E52, E58, F31, F41

Suggested Citation

George, Ammu and Xie, Taojun and Alba, Joseph Dennis A., Central Bank Digital Currency with Adjustable Interest Rate in Small Open Economies (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3605918 or http://dx.doi.org/10.2139/ssrn.3605918

Ammu George

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
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 (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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