Macro-financial implications of central bank digital currencies

The considerable deployment of central bank digital currencies (CBDCs) is imminent, as its in-terest has attracted the whole world. However, CBDCs faces several political, technological, and legal challenges. We add a few more challenges that have not received much attention and summarize them in the extant literature. We then emphasize a broad version of money to examine its likely impact on financial stability. Moreover, using time series data of three leading econo-mies and replying to past episodes' evidence of financial innovation, the historical behaviour to incorporate the impact of CBDCs, and the velocity of circulation, we scrutinize the hypothetical influence of CBDCs on financial stability and inflation. This study employs McCallum's policy rule based on money growth, which deals with monetary policy. Our simulations indicate that the CBDCs do not produce higher inflation while setting financial stability at risk. This study also suggests the necessary policy implications.

Automated summary

The considerable deployment of central bank digital currencies (CBDCs) is imminent, but it faces political, technological, and legal challenges. This study summarizes additional challenges that have been overlooked and examines the potential impact of a broad version of money on financial stability. Using time series data and historical behavior of financial innovation, the study scrutinizes the hypothetical influence of CBDCs on financial stability and inflation, employing McCallum's policy rule based on money growth. The simulations indicate that CBDCs do not result in higher inflation but may pose risks to financial stability. The study also suggests necessary policy implications.