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Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting

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  • Lim, King Yoong
  • Liu, Chunping
  • Zhang, Shuonan

Abstract

We develop a DSGE model with cash deposits and digital currencies to study the economic stability of two potential central banking policies in China, a Loan Prime Rate (LPR) policy function and central bank digital currency (CBDC) implementation. We Bayesian-estimate both a benchmark model and a “Post-CBDC world”. In the post-CBDC world, although the introduction of CBDC appears to deepen the procyclicality of macroeconomic variables to real shocks, a potential LPR-setting policy appears to have some degree of policy complementarity with CBDC to mitigate this. We also uncover an optimal policy combination of the LPR rule and Taylor-style CBDC rule.

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  • Lim, King Yoong & Liu, Chunping & Zhang, Shuonan, 2024. "Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting," Emerging Markets Review, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000037
    DOI: 10.1016/j.ememar.2024.101108
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    More about this item

    Keywords

    China; Digital currency; Loan prime rate; Monetary policy; Bayesian DSGE models;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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