Connectedness between central bank digital currency index, financial stability and digital assets

Abstract

This study examines the interconnectedness between central bank digital currencies (CBDC) index, digital assets and financial stability. First, we use the CBDC index as a measure of financial stability and examine its connectedness with other known measures of financial stability used in the literature. Secondly, we analyse the connectedness of CBDC index with digital assets such as cryptocurrencies and non-fungible tokens and various measures of financial stability. By analysing index returns of CBDC data and applying various connectedness measures to CBDC index, cryptocurrencies, stablecoins and NFTs, we gain insights into the relationships among these assets within a framework. The findings reveal a significant level of connectedness between CBDCs index, digital assets and financial stability. Our analysis shows a weak positive connectedness between CBDCs index and digital assets, indicating that movements in the CBDC index are not closely related to the performance of various digital assets and have a very small contribution to the changes in the returns of digital assets. Furthermore, the study finds bidirectional connectedness between CBDCs and other financial stability measures, suggesting that changes in CBDC performance can influence the overall stability of the financial system, and vice versa. This highlights the importance of carefully considering the design and implementation of CBDCs to ensure they support financial stability objectives.