The Macroeconomic Effects of an Interest-Bearing CBDC: A DSGE Model

Abstract

We develop a medium size dynamic stochastic general equilibrium (DSGE) model to assess the macroeconomic consequences of introducing an interest-bearing central bank digital currency (CBDC), an electronic alternative of payment with public use properties of cash and that can furnish as bank settlement balances. The model consists of seven sectors, namely households, retail firms, wholesale firms, capital producing firms, commercial banks, central bank, and government, and offers rich features. The use of cash and CBDC is differentiated with respect to their prices and transaction costs. In particular, we quantify the effects of negative shock on CBDC transaction cost to evaluate the potential of CBDC as an alternate instrument in liquidity holding in addition to cash and bank deposits. We also examine the effects of productivity shock and monetary policy shock on CBDC interest rate and CBDC demand, and their interaction with other main variables of the model.