Earlier this month, researchers at the European Central Bank (ECB) published a report on Central Bank Digital Currency (CBDC) and the potential impact on foreign economies. It found that CBDC increases the international ramifications of monetary shocks, but the CBDC design can help to address the issues.
It modeled various scenarios with two open economies in which there were financial shocks, both with and without CBDCs. In the absence of a CBDC, there’s often a movement of assets into foreign currency bonds when there are shocks to an economy. In a scenario where there are also CBDCs, the switch is more likely to be into a foreign currency CBDC than bonds.
This shift can be reduced by restricting access to the CBDC by foreigners or controlling the digital currency’s interest rate.
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