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Central bank digital currency in small open economies

Author

Listed:
  • Fan, Rong
  • Walker, Todd B.
  • Wright, Allan

Abstract

This paper examines how the introduction of Central Bank Digital Currency (CBDC) impacts small open economies (SOE). We build a Two-Agent New Keynesian (TANK) model with financially constrained agents, where both cash and CBDC provide liquidity service. CBDC lowers the cost of carrying liquid assets but does not provides anonymity like cash. Our main results are: (i) CBDC always increases the welfare of financially unconstrained households; however, it increases the welfare of constrained households when the cost of carrying cash is high enough and when the government purchase level is sufficiently low; (ii) CBDC increases the fiscal income by bringing more agents out of the informal economy, improving fiscal sustainability; (iii) CBDC improves the terms of trade as it strengthens the domestic currency.

Suggested Citation

  • Fan, Rong & Walker, Todd B. & Wright, Allan, 2025. "Central bank digital currency in small open economies," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 6(2).
    • Handle: RePEc:eee:lajcba:v:6:y:2025:i:2:s2666143824000334
    DOI: 10.1016/j.latcb.2024.100151
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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