CBDC policies in open economies

BIS Working Papers  |  No 1086  | 
03 April 2023



Central banks are currently considering issuing digital money to the general public, known as central bank digital currency (CBDC). Much attention so far has focused on the microeconomic benefits of CBDC, while the implications for macroeconomic and financial stability remain less well understood. What are the macroeconomic gains and risks associated with CBDC, particularly if it could be transferred across borders? And how should the central bank set its CBDC policy in the light of these potential benefits and costs?


We study the macroeconomic and monetary policy implications of CBDC issuance in a rich quantitative framework. We introduce CBDC into a carefully calibrated and estimated two-country DSGE environment, featuring a realistic financial system, monetary policy (via the conventional policy interest rate and a separate CBDC policy) and fiscal policy. We use the model to examine: (i) the consequences of transitioning to a CBDC economy; (ii) the design of optimal simple rules for CBDC policy, in terms of interest rate or quantity; and (iii) the open economy effects of introducing CBDC.


Transitioning to a CBDC economy brings about substantial welfare gains, worth over 2% of steady state consumption in the long run. By counteracting financial shocks, CBDC policy would also help stabilise aggregate demand and inflation. For example, the optimised CBDC interest rule that responds systematically to the credit gap improves welfare by over 1% of steady-state consumption. Finally, when countries adopt optimal CBDC policies, they reduce volatilities of cross-border banking exposures and exchange rates by about a third.


We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP.

JEL Classification: E41, E42, E43, E44, E52, E58, F41

Keywords: central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation