Central bank digital currency in small open economies
This paper examines how the introduction of Central Bank Digital Currency (CBDC) impacts small open economies (SOE). We build a Two-Agent New Keynesian (TANK) model with financially constrained agents, where both cash and CBDC provide liquidity service. CBDC lowers the cost of carrying liquid assets...
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| Format: | Article |
| Language: | English |
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Elsevier
2025-06-01
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| Series: | Latin American Journal of Central Banking |
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| Online Access: | http://www.sciencedirect.com/science/article/pii/S2666143824000334 |
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| author | Rong Fan Todd B. Walker Allan Wright |
| author_facet | Rong Fan Todd B. Walker Allan Wright |
| author_sort | Rong Fan |
| collection | DOAJ |
| description | This paper examines how the introduction of Central Bank Digital Currency (CBDC) impacts small open economies (SOE). We build a Two-Agent New Keynesian (TANK) model with financially constrained agents, where both cash and CBDC provide liquidity service. CBDC lowers the cost of carrying liquid assets but does not provides anonymity like cash. Our main results are: (i) CBDC always increases the welfare of financially unconstrained households; however, it increases the welfare of constrained households when the cost of carrying cash is high enough and when the government purchase level is sufficiently low; (ii) CBDC increases the fiscal income by bringing more agents out of the informal economy, improving fiscal sustainability; (iii) CBDC improves the terms of trade as it strengthens the domestic currency. |
| format | Article |
| id | doaj-art-c4f1ca749d6041b4b004bc5d60874aed |
| institution | OA Journals |
| issn | 2666-1438 |
| language | English |
| publishDate | 2025-06-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Latin American Journal of Central Banking |
| spelling | doaj-art-c4f1ca749d6041b4b004bc5d60874aed2025-08-20T02:17:09ZengElsevierLatin American Journal of Central Banking2666-14382025-06-016210015110.1016/j.latcb.2024.100151Central bank digital currency in small open economiesRong Fan0Todd B. Walker1Allan Wright2Department of Economics, Indiana University, United States of AmericaDepartment of Economics, Indiana University, United States of America; Corresponding author.Central Bank of The Bahamas, BahamasThis paper examines how the introduction of Central Bank Digital Currency (CBDC) impacts small open economies (SOE). We build a Two-Agent New Keynesian (TANK) model with financially constrained agents, where both cash and CBDC provide liquidity service. CBDC lowers the cost of carrying liquid assets but does not provides anonymity like cash. Our main results are: (i) CBDC always increases the welfare of financially unconstrained households; however, it increases the welfare of constrained households when the cost of carrying cash is high enough and when the government purchase level is sufficiently low; (ii) CBDC increases the fiscal income by bringing more agents out of the informal economy, improving fiscal sustainability; (iii) CBDC improves the terms of trade as it strengthens the domestic currency.http://www.sciencedirect.com/science/article/pii/S2666143824000334CBDCFiscal policyDigital currency |
| spellingShingle | Rong Fan Todd B. Walker Allan Wright Central bank digital currency in small open economies Latin American Journal of Central Banking CBDC Fiscal policy Digital currency |
| title | Central bank digital currency in small open economies |
| title_full | Central bank digital currency in small open economies |
| title_fullStr | Central bank digital currency in small open economies |
| title_full_unstemmed | Central bank digital currency in small open economies |
| title_short | Central bank digital currency in small open economies |
| title_sort | central bank digital currency in small open economies |
| topic | CBDC Fiscal policy Digital currency |
| url | http://www.sciencedirect.com/science/article/pii/S2666143824000334 |
| work_keys_str_mv | AT rongfan centralbankdigitalcurrencyinsmallopeneconomies AT toddbwalker centralbankdigitalcurrencyinsmallopeneconomies AT allanwright centralbankdigitalcurrencyinsmallopeneconomies |