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Central bank digital currency competition and the impossible trinity

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  • Karau, Sören

Abstract

It has been established that in a standard two-country asset pricing model the usage of a privately-issued crypto-asset as a global means of payment leads to the enforced synchronization of nominal interest rates, and hence to a loss of monetary policy autonomy. This paper uses the same framework to show that an identical result obtains in a world in which central banks issue digital currencies (CBDC) to be used abroad. I then integrate the asset pricing conditions into a fully-specified dynamic stochastic general equilibrium model to qualitatively study how shocks are transmitted across borders. In the baseline case, shock transmission is symmetric, whereas it is asymmetric if only one country issues international CBDC or crypto-assets are tied to one currency (stablecoin). I discuss policy implications for the ongoing debate on international aspects of CBDC.

Suggested Citation

  • Karau, Sören, 2023. "Central bank digital currency competition and the impossible trinity," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000971
    DOI: 10.1016/j.frl.2023.103723
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    References listed on IDEAS

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    More about this item

    Keywords

    CBDC; Cryptocurrency; Currency competition; Impossible trinity; Independent monetary policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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