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The impact of central bank digital currency on monetary policy effectiveness

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Abstract

The emergence of central bank digital currency (CBDC) is a historic event in the transformation of traditional legal monetary forms. Its issuance and circulation change the existing monetary hierarchy and monetary system. From the perspective that CBDC affects the monetary policy effectiveness, we introduce CBDC, quantity rule, and price rule into the traditional dynamic stochastic general equilibrium model, and propose a new DSGE model including households, manufacturers, the government, and the central bank. The impacts of CBDC on the effectiveness of quantity-based and price-based monetary policies are discussed separately, and three conclusions are drawn. First, the technology shock has better policy effects under the price rule. Second, the response of economic variables to the price rule shock is more significant. Third, the CBDC interest rate shock produces desirable policy effects on economic variables. Based on the above conclusions, we put forward policy suggestions and future research directions.

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Acknowledgements

The authors would like to express our sincere gratitude to Prof. George Hondroyiannis, the Editor-in-Chief of the journal for his meticulous review and constructive feedback. In addition, the authors acknowledge to Yaxin Qi for her valuable advice in the revision of the paper. Finally, this study is supported by the National Social Science Fund of China (Grant No. 21XJY014).

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Correspondence to Binghui Wu.

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Wu, B., Zhang, M. The impact of central bank digital currency on monetary policy effectiveness. Econ Change Restruct 57, 135 (2024). https://doi.org/10.1007/s10644-024-09720-y

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