Central bank digital currency in an open economy

Abstract

A two-country DSGE model with central bank digital currency (CBDC) is derived and used to analyze the open-economy implications of CBDC for the transmission of shocks, optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks and increases international linkages. The magnitude of the effects depends crucially on the design of CBDC. Moreover, issuance of a CBDC by one economy increases asymmetries in the international monetary system by reducing monetary policy autonomy and welfare in the other economy.