Central bank digital currency, banking stability, and the macroeconomy: A dynamic stochastic general equilibrium analysis

The rapid development of information technology has made it easier to transform cash payments into cashless transactions. As an innovative payment instrument, central bank digital currency (CBDC) has been widely considered by various countries. Against the backdrop of CBDC issuance in China, this study constructs a seven-sector dynamic stochastic general equilibrium (DSGE) model with the bankruptcy risk of banks to analyze how CBDC affects banking stability and the macroeconomy from both static and dynamic perspectives in the two stages of CBDC replacing traditional currency and deposits. The findings are summarized below. The substitution of CBDC for traditional currency only changes the form of currency, but the substitution of CBDC for bank deposits changes the structure of monetary assets. Affected by the CBDC technology shock, banking stability is improved in the short run. In the long run, it remains enhanced during the stage where CBDC replaces traditional currency, but is slightly weakened during the stage where CBDC replaces bank deposits. Besides, the short-term impact of CBDC on the macroeconomy is negative in both substitution stages, but the long-term impact shifts from negative to positive in the stage of CBDC replacing bank deposits. This study offers valuable policy implications for enhancing the effects of central bank monetary policies and the risk management capabilities of commercial banks.