The paper develops a general equilibrium model to study how the introduction of a central bank digital currency (CBDC) by a systemic economy can affect the choices of residents in a small open economy. We analyse the consequences on the banking system and on economic activity of an increase in the preference for the foreign CBDC, to the detriment of that for domestic currency and deposits.
An increase in the preference for the foreign CBDC induces a banking crisis and has a negative impact on GDP, the greater the more the foreign CBDC is perceived as deposit-like. Public authorities can mitigate these effects with multiple tools: by taxing the CBDC, by easing macroprudential requirements, or through FX interventions. A higher stock of foreign CBDC held by households can shield the small economy from an increase in the interest rate on external debt, if the remuneration of the CBDC remains constant.
Published in 2024 in: Journal of Economic Dynamics and Control, v. 159, Article 104801.
