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The external financial spillovers of CBDCs

Author

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  • Alessandro Moro

    (Bank of Italy)

  • Valerio Nispi Landi

    (Bank of Italy)

Abstract

Using a DSGE model, we study the macroeconomic consequences of a foreign central bank digital currency (CBDC) being available to residents in a small open economy. We find that a gradual and permanent increase in domestic households' preference for a foreign CBDC leads to a structural reduction in economic activity, especially when the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can help smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than CPI targeting or an exchange-rate peg. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt if the CBDC remuneration remains constant.

Suggested Citation

  • Alessandro Moro & Valerio Nispi Landi, 2023. "The external financial spillovers of CBDCs," Temi di discussione (Economic working papers) 1416, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1416_23
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    More about this item

    Keywords

    central bank digital currency; DSGE model; open economy macroeconomics; financial globalization;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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