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Informal economy and central bank digital currency

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  • Eun Young Oh
  • Shuonan Zhang

Abstract

This paper explores the association between the informal economy and the adoption of central bank digital currency (CBDC) by end users, namely households and businesses. Our findings suggest that CBDC may not be widely accepted by end users in the presence of a sizable informal economy in which cash is the primary method of payment. CBDC can decrease informality, but this effect becomes weaker in countries with larger informal economies. Tax reduction and CBDC interest rates can be useful tools to promote the adoption and effectiveness of CBDC, leading to a reallocation effect between formal and informal sectors.

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  • Eun Young Oh & Shuonan Zhang, 2022. "Informal economy and central bank digital currency," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1520-1539, October.
  • Handle: RePEc:bla:ecinqu:v:60:y:2022:i:4:p:1520-1539
    DOI: 10.1111/ecin.13105
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    Cited by:

    1. Ozili, Peterson K, 2022. "Circular economy and central bank digital currency," MPRA Paper 113469, University Library of Munich, Germany.
    2. Danny Hermawan & Denny Lie & Aryo Sasongko & Richard I. Yusan, 2023. "Money velocity, digital currency, and inflation dynamics," Working Papers 2023-01, University of Sydney, School of Economics.
    3. Agur, Itai & Ari, Anil & Dell’Ariccia, Giovanni, 2022. "Designing central bank digital currencies," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 62-79.
    4. Huosong Xia & Yangmei Gao & Justin Zuopeng Zhang, 2023. "Understanding the adoption context of China’s digital currency electronic payment," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.
    5. Mishra, Bineet & Prasad, Eswar, 2023. "A Simple Model of a Central Bank Digital Currency," IZA Discussion Papers 16154, Institute of Labor Economics (IZA).
    6. Alonso-Robisco, Andres & Carbó, José Manuel, 2023. "Analysis of CBDC narrative by central banks using large language models," Finance Research Letters, Elsevier, vol. 58(PC).
    7. Adam Tooze, 2021. "Debating Central Bank Mandates," Working Papers 1, Forum New Economy.

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    More about this item

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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