A DSGE Model for a Small Open Economy with a CBDC Option

This paper develops a small open economy DSGE model for central bank policy analysis. The model’s structure and calibration are based on the Moroccan economy, but with minor modifications the same model can be applied to many other economies. The framework features two household groups, banked households who have access to cash but also to credit and therefore to deposits as medium of exchange, and unbanked households who rely exclusively on cash. Households interact with banks, financial investors, firms, unions, a fiscal authority, a central bank, and the external sector. The model can be simulated either with or without a retail CBDC, which is introduced as an additional payment instrument alongside cash and bank deposits. A central mechanism is the interaction between real decisions and payment frictions. Consumption- and production-related payments are subject to money-in-advance constraints, where money or liquidity is a composite of cash, deposits, and—when activated—CBDC. Any scarcity of money therefore affects spending, marginal costs and inflation, while credit frictions connect collateral quality and default risk to the scarcity of money. The paper finds that the introduction of CBDC causes modest steady state output gains and modest improvements in the economy’s ability to deal with financial shocks.