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Optimal Central Banking Policies: Envisioning the Post-Digital Yuan Economy with Loan Prime Rate-setting

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  • King Yoong Lim
  • Chunping Liu
  • Shuonan Zhang

Abstract

We develop a DSGE model with cash and digital currency to study the financial stability properties of two potential central banking policies in China. Specifically, a Loan Prime Rate (LPR)-setting policy function and central bank digital currency (CBDC) implementation are examined. Distinguish between a benchmark model and a "Post-CBDC world", we Bayesian-estimate the model. Post-CBDC implementation, we find macroeconomic variables to display greater procyclicality to real shocks. However, we also find a potential LPR-setting policy to exhibit an improved stabilization property in the post-CBDC world. We uncover an optimal design of LPR policy function, which targets more specifically housing and capital asset markets, as well as the growth in CBDC. This suggests a potential policy complementarity between these two seemingly unrelated central banking policies in the financial stability agenda of China going forward.

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  • King Yoong Lim & Chunping Liu & Shuonan Zhang, 2021. "Optimal Central Banking Policies: Envisioning the Post-Digital Yuan Economy with Loan Prime Rate-setting," NBS Discussion Papers in Economics 2021/02, Economics, Nottingham Business School, Nottingham Trent University.
  • Handle: RePEc:nbs:wpaper:2021/02
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    More about this item

    Keywords

    China; Digital Currency; Loan Prime Rate; Monetary Policy; Bayesian DSGE models.;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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