Evaluating the effectiveness of monetary policy for retail central bank digital currency

Abstract

This paper evaluates the macroeconomic effects of monetary policy for a central bank digital currency rule with traditional monetary policy in an open environment. We build a dynamic stochastic general equilibrium small open model economy with interest-bearing central bank digital currency assets. The redistribution of asset holdings and the change in asset price are the two pathways through which a retail central bank digital currency rule under the traditional monetary policy affects the macroeconomy. Fiat's digital and traditional monetary policies complement one another in lowering macroeconomic fluctuations. As a result, the real exchange rate, current accounts, and consumption are more stable in transmitting foreign shocks. These results occur when price-based or quantitative-based fiat digital monetary policy parallels traditional price-based monetary policy.