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Central Bank Digital Currency in a Developing Economy: A Dynamic Stochastic General Equilibrium Analysis

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  • Rivera Moreno, Pablo Nebbi
  • Triana Montaño, Karol Lorena

Abstract

Central Bank Digital Currency (CBDC) has been in the center of discussion of many monetary policy research agendas. We explore how the business cycle behavior of a developing economy is affected by the introduction of this type of money as a second monetary policy tool. We emphasize on the characteristic dual formal and informal labor markets that are present in most developing economies, given its relevance on explaining the business cycle dynamics. Our main contribution is the building of a model that encompasses such characteristics and features the relevance of monetary balances to macroeconomic fluctuations. We find that CBDC has the ability to improve the monetary policy effectiveness, and the response of relevant variables may be amplified or dampened, depending on the nature of the shock. Also the magnitude of the new dynamics introduced by CBDC are also profoundly dependant on its structural parameters. The main transmission mechanisms that are affected by CBDC are the dynamics of distortions generated by transaction costs.

Suggested Citation

  • Rivera Moreno, Pablo Nebbi & Triana Montaño, Karol Lorena, 2022. "Central Bank Digital Currency in a Developing Economy: A Dynamic Stochastic General Equilibrium Analysis," Dynare Working Papers 74, CEPREMAP.
    • Handle: RePEc:cpm:dynare:074
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