The Investigation of the Effect of the Central Bank's Digital Currency Expansion on Economic Resilience

Abstract

Introduction: Globalization and digitization, especially the emergence of innovative payment solutions from fintech and large technology companies, have prompted central banks to consider upgrading payment system infrastructure as well as the broader concept and provision of money. The supposed trend towards a cashless “society” has prompted central banks to consider issuing currency in digital form, known as “sovereign digital currencies” or “central bank digital currencies” (CBDCs). This issue has increased the interest of policymakers and scientific communities in digital currencies of the central bank. The introduction of Central Bank Digital Currencies will mark the beginning of a new monetary era. A recent survey found that central banks representing a fifth of the world's population are likely to issue a CBDC "very soon," while 80 percent of central banks worldwide are considering issuing a CBDC.
On the other hand, the COVID-19 pandemic has raised public concerns about the transmission of the virus through cash, thus increasing calls for the development of contactless payment methods such as CBDC.
In general, one of the main goals of CBDC is to increase access to central bank reserves beyond the small territory of commercial banks for the general public; a concept sometimes referred to as "reserves for all". Therefore, cash will no longer be the only form of central bank money through which people can trade and save; rather, these things can be done with the reserves deposited in the central bank.
CBDCs can reduce costs. They can be provided through digital wallets on mobile devices, reducing the costs associated with maintaining physical bank accounts and transaction fees. CBDCs may also lower the price of cross-border (and possibly domestic) payments by reducing intermediaries in the normal transaction chain through closer connectivity or direct access to central bank clearing accounts.
The central bank's digital currencies can increase the resilience of the economy against shocks by increasing the efficiency of the payment system. However, its incorrect implementation may lead to increased systematic risks that reduce resilience. Therefore, the basic and safe design and implementation of the central bank's digital currency is important to maintain the resilience of the economy against shocks.
According to the above, the main motivation of the present study is to explore the effect of the central bank's digital currency expansion on the resilience of Iran's economy using a dynamic stochastic general equilibrium model.
Methodology: In this paper, a dynamic stochastic general equilibrium model was presented and estimated using the Bayesian approach and seasonal data in the period of 03.20.2004-06.22.2022.
The parameters of the model are estimated using the Bayesian approach and the Random Walk Metropolis-Hastings algorithm. In this regard, the data of the observable variables of the model include seasonally adjusted data of GDP with and without oil, consumption expenditures, investment expenditures, government expenditures, foreign reserves of the central bank, consumer price index, and the growth rate of money has been used.
Discussion and Results: The results of the Markov Chain Monte Carlo diagnostic test of Brooks and Gelman (1989) showed that the parameter estimates are appropriate and reliable. The results showed that the increase in CBDC issuance causes an increase in the interest rate and a decrease in the real interest rate, which reduces the demand for cash, and increases the GDP, employment hours, and economic growth. This part of the results of the current research is consistent and similar with the results of Varshosaz et al. (2021), and Sokooti et al. (2022). The increase in production led to a decrease in inflation and an increase in the real exchange rate and foreign reserves of the central bank. This part of the results of the present study was consistent and similar to the results of the study of Barrdear and Kumhof (2022). Furthermore, considering the increase in transparency in the economy and the decrease in transaction costs, consumption expenditures and investment expenditures increased; and government spending and the ratio of government budget deficit to GDP decreased.
In this research, following Briguglio and Galea (2003) and Farrugia (2007), the components of the central bank's foreign reserves, the ratio of government budget deficit to GDP, and inflation were used to analyze economic resilience:
The reduction of inflation and the ratio of government budget deficit to GDP, and on the other hand, the increase of foreign reserves of the central bank, have led to an increase in economic resilience.
Policy recommendations: According to the results of the estimation of the model, it is suggested that the government, as a monetary authority, manage its expenses by issuing CBDC and thereby reduce the budget deficit. On the other hand, with the release of this type of currency and increased transparency in the economy, as an expansion policy, the requirements and circumstances will be created to increase economic growth.
Declaration of Competing Interest: The authors have no conflicts of interest to declare that are relevant to the content of this article.
Acknowledgments: We thank anonymous reviewers for their useful comments greatly contributing to improving our work.
JEL Classifications: C11, E31, E58.

Keywords

Central Bank Digital Currency Economic resilience Dynamic Stochastic General Equilibrium model Bayesian estimation

Full text

The Investigation of the Effect of the Central Bank's Digital
Currency Expansion on Economic Resilience
Mehdi Soltaninejad1 , Ali Raeispour Rajabali2
Mohsen Zayandehroodi3
1. PhD Student in International Economics, Faculty of Literature and Humanities, Islamic Azad University, Kerman Branch,
Kerman, Iran.
mehdi.soltaaani@gmail.com
2. Assistant Professor, Department of Economics, Faculty of Literature and Humanities, Islamic Azad University, Kerman Branch,
Kerman, Iran.
raeispour@iauk.ac.ir
3. Associate Professor, Department of Economics, Faculty of Literature and Humanities, Islamic Azad University, Kerman Branch,
Kerman, Iran.
m_roody2000@yahoo.com
Received: 2024/05/22; Accepted: 2024/10/14
1
Extended Abstract
Introduction: Globalization and digitization, especially the emergence of innovative payment solutions from fintech
and large technology companies, have prompted central banks to consider upgrading payment system infrastructure as
well as the broader concept and provision of money. The supposed trend towards a cashless “society” has prompted
central banks to consider issuing currency in digital form, known as “sovereign digital currencies” or “central bank
digital currencies” (CBDCs). This issue has increased the interest of policymakers and scientific communities in digital
currencies of the central bank. The introduction of Central Bank Digital Currencies will mark the beginning of a new
monetary era. A recent survey found that central banks representing a fifth of the world's population are likely to issue a
CBDC "very soon," while 80 percent of central banks worldwide are considering issuing a CBDC.
On the other hand, the COVID-19 pandemic has raised public concerns about the transmission of the virus through
cash, thus increasing calls for the development of contactless payment methods such as CBDC.
In general, one of the main goals of CBDC is to increase access to central bank reserves beyond the small territory of
commercial banks for the general public; a concept sometimes referred to as "reserves for all". Therefore, cash will no
Copyright: © 2024 by the authors. Submitted for possible open access publication
under the terms and conditions of the Creative Commons Attribution (CC BY)
License (https://creativecommons.org/licenses/by/4.0/).
Economic Essays
Journal homepage: https://iee.rihu.ac.ir/
Original Article
Research Institute of
Hawzah and University
Economic Essays. 2024. Summer 21(42), 1-19; DOI:10.30471/IEE.2024.10166.2414
Economic Essays
Journal homepage: https://iee.rihu.ac.ir/
Original Article
Research Institute of
Hawzah and University

longer be the only form of central bank money through which people can trade and save; rather, these things can be
done with the reserves deposited in the central bank.
CBDCs can reduce costs. They can be provided through digital wallets on mobile devices, reducing the costs associated
with maintaining physical bank accounts and transaction fees. CBDCs may also lower the price of cross-border (and
possibly domestic) payments by reducing intermediaries in the normal transaction chain through closer connectivity or
direct access to central bank clearing accounts.
The central bank's digital currencies can increase the resilience of the economy against shocks by increasing the
efficiency of the payment system. However, its incorrect implementation may lead to increased systematic risks that
reduce resilience. Therefore, the basic and safe design and implementation of the central bank's digital currency is
important to maintain the resilience of the economy against shocks.
According to the above, the main motivation of the present study is to explore the effect of the central bank's digital
currency expansion on the resilience of Iran's economy using a dynamic stochastic general equilibrium model.
Methodology: In this paper, a dynamic stochastic general equilibrium model was presented and estimated using the
Bayesian approach and seasonal data in the period of 03.20.2004-06.22.2022.
The parameters of the model are estimated using the Bayesian approach and the Random Walk Metropolis-Hastings
algorithm. In this regard, the data of the observable variables of the model include seasonally adjusted data of GDP with
and without oil, consumption expenditures, investment expenditures, government expenditures, foreign reserves of the
central bank, consumer price index, and the growth rate of money has been used.
Discussion and Results: The results of the Markov Chain Monte Carlo diagnostic test of Brooks and Gelman (1989)
showed that the parameter estimates are appropriate and reliable. The results showed that the increase in CBDC
issuance causes an increase in the interest rate and a decrease in the real interest rate, which reduces the demand for
cash, and increases the GDP, employment hours, and economic growth. This part of the results of the current research is
consistent and similar with the results of Varshosaz et al. (2021), and Sokooti et al. (2022). The increase in production
led to a decrease in inflation and an increase in the real exchange rate and foreign reserves of the central bank. This part
of the results of the present study was consistent and similar to the results of the study of Barrdear and Kumhof (2022).
Furthermore, considering the increase in transparency in the economy and the decrease in transaction costs,
consumption expenditures and investment expenditures increased; and government spending and the ratio of
government budget deficit to GDP decreased.
In this research, following Briguglio and Galea (2003) and Farrugia (2007), the components of the central bank's
foreign reserves, the ratio of government budget deficit to GDP, and inflation were used to analyze economic resilience:
The reduction of inflation and the ratio of government budget deficit to GDP, and on the other hand, the increase of
foreign reserves of the central bank, have led to an increase in economic resilience.
Policy recommendations: According to the results of the estimation of the model, it is suggested that the government,
as a monetary authority, manage its expenses by issuing CBDC and thereby reduce the budget deficit. On the other
hand, with the release of this type of currency and increased transparency in the economy, as an expansion policy, the
requirements and circumstances will be created to increase economic growth.
Economic Essays
Journal homepage: https://iee.rihu.ac.ir/
Original Article
Research Institute of
Hawzah and University
Economic Essays
Journal homepage: https://iee.rihu.ac.ir/
Original Article
Research Institute of
Hawzah and University
Economic Essays. 2024. Summer 21(42), 1-19; DOI:10.30471/IEE.2024.10166.2414

Declaration of Competing Interest: The authors have no conflicts of interest to declare that are relevant to the content
of this article.
Acknowledgments: We thank anonymous reviewers for their useful comments greatly contributing to improving our
work.
JEL Classifications: C11, E31, E58.
Keywords: Central Bank Digital Currency, Economic resilience, Dynamic Stochastic General Equilibrium model,
Bayesian estimation.
Cite this article: Mehdi Soltaninejad & Ali Raeispour Rajabali & Mohsen Zayandehroodi. (2024), “The Investigation of
the Effect of the Central Bank's Digital Currency Expansion on Economic Resilience”, Economic Essays, 21(42), 1-19.
Economic Essays
Journal homepage: https://iee.rihu.ac.ir/
Original Article
Research Institute of
Hawzah and University
Economic Essays. 2024. Summer 21(42), 1-19; DOI:10.30471/IEE.2024.10166.2414

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raeispour@iauk.ac.ir
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m_roody2000@yahoo.com
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CBDC
CBDC

 CBDC
CBDC




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Copyright: © 2024 by the authors. Submitted for possible open access publication
under the terms and conditions of the Creative Commons Attribution (CC BY)
License (https://creativecommons.org/licenses/by/4.0/).

Journal homepage:
https://islamicedu.rihu.ac.ir/

Research Institute of
Hawzah and University
Islamic. Edu. 2024. 19(49), 53- 68; DOI:10.30471/edu.2024.9876.2863

Journal homepage: https://iee.rihu.ac.ir/

Research Institute of
Hawzah and University
-2414 .10166 .2024.IEE10.30471/DOI:

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Random Walk Metropolis-Hastings



CBDC





 GDP




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



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
GDP

CBDC






                                                    




Journal homepage: https://iee.rihu.ac.ir/

Research Institute of
Hawzah and University
-2414 .10166 .2024.IEE10.30471/DOI:




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
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

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
4



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
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



7

CBDCs
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
CBDC
CBDC
9

CBDC

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-
CBDC
11

CBDC

12


13



14

-
15


16




17


DSGE

1
. PayPal.
2
. Alipay.
3
. WeChat Pay.
4
. Libra.
5
. Sovereign Digital Currencies.
6
. Central Bank Digital Currencies (CBDC).
7
. Ferrari Minesso, Mehl, & Stracca.
8
. Laboure, H.-P. Müller, Heinz, Singh, & Köhling.
9
. Boar, Holden, & Wadsworth.
10
. Soderberg, Kiff, Bechara, Forte, Kao, Lannquist, Sun, Tourpe, Yoshinaga.
11
. Auer, Cornelli, & Frost.
12
. Reserves for all.
13
. Tobin.
14
. Economic Resilience (ER).
15
. Adrian & Mancini-Griffoli, IMF 2019.
16
. Brunnermeier.
17
. Dynamic Stochastic General Equilibrium (DSGE).



-

1

2
b
CBDC
3


4

5

6

CBDC
CBDC
CBDC
CBDC

CBDC

CBDC

7

CBDC
 
8
-
9



10

CBDC
CBDC
CBDCCBDC
CBDCCBDCCBDC

11
CBDC

CBDC


CBDC
1
. Fiat currency
2
. Yao.
3
. Krylov, Lisitsyn, & Polyakov.
4
. Bitcoin.
5
. Ethereum.
6
. Binance Coin.
7
. Das, Mancini Griffoli, Nakamura, Otten, Soderberg, Sole, & Tan.
8
. Agarwal, Agarwal, Agarwal, Agarwal.
9
. Fernández-Villaverde, Sanches, Schilling, & Uhlig.
10
. Tronnier.
11
. Auer, & Boehme.



1




2

3




-

4

5

CBDCsCBDC

6

DSGECBDC

CBDC 
DSGECBDC 


7
CBDC 
DSGECBDC

CBDC
CBDCDSGE
CBDCCBDC
CBDC


DSGE-



-
8
-
1
. Barrdear, & Kumhof.
2
. Briguglio, & Galea.
3
. Farrugia.
4
. Zams, Indrastuti, Pangersa, Hasniawati, Zahra, & Fauziah.
5
. The analytic network processes.
6
. Tong, & Jiayou.
7
. Rivera Moreno, & Triana Montaño.
8
. Baumol, & Tobin.



DSGE-











-




 󰇝󰇞     





t






1

󰇩

󰇪
  

󰇛󰇜󰇭
󰇮󰇡
 󰇢 


󰇭
󰇮󰇡
 󰇢





 



 

 
 













 


1
. The Constant Elasticity of Substitution.




 
󰇛󰇜
 

󰇛󰇜  

󰇡
󰇢󰇡
 󰇢󰇡
 󰇢󰇡
 󰇢
 
󰇡 
 󰇢   
󰇡
󰇢
 
󰇯
󰇰    
󰇡
󰇢󰇡
󰇢
󰇯
󰇰  
󰇭 
 󰇮 
   

-
CES
󰇟
 󰇠


    






   


󰇛
󰇜  
-

󰇟󰇛󰇜󰇠


  



-


󰇛󰇜 


󰇡
󰇢󰇡
󰇢󰇛󰇜  






󰇱󰇛󰇜
󰇲
  
󰇡
󰇢󰇡󰇛󰇜
󰇢󰇛󰇜
   



󰇟󰇠






󰇯󰇛󰇜󰇛󰇜
󰇰󰇛󰇜 

-


󰇡
󰇢󰇡
󰇢󰇛󰇜

t



󰇭 
󰇮 






-




󰇛󰇜 







 

 
󰇛󰇜

󰇡
󰇢󰇡
󰇢 





󰇭 
󰇮󰇛󰇜  





      

 


󰇡





󰇢󰇡






󰇢
  

t



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 




  






  








 
  



󰇡

󰇢󰇡

󰇢󰇡







󰇢   





󰇛󰇜󰇟󰇠   





-

   









-
-
1




-
















/
/
[/,/]



/
/
[/,/]



/
/
[/,/]



/
/
[/,/]




/
[/,/]
1
. Random Walk Metropolis-Hastings algorithm.





/
/
[/,/]



/
/
[/,/]



/
/
[/4,/]




/
[/,/]



/
/
[/,/]



/
/
[/,/]



-/
-/
[-/,-/]



-/
-/
[-/,-/]

CBDCGDP

/
/
[/,/]



/
/
[/,/]





[/,/]



/
/
[0/,0/]





[,]

CBDC



[0/,0/]





[/,/]





[/,/]

CBDC



[/,/]





[/,]





[/,/]





[/,/]





[/,/]





[/,/]





[/,/]




/
[/,/]

CBDC


/
[/,/]




/
[/,/]




/
[/,/]




/
[/,/]








-
1

2


1
. Monte Carlo Markov Chain (MCMC).
2
. Brooks, & Gelman.





-

CBDCCBDC

CBDC

GDPER








-
CBDCCBDC

CBDC

-




--
CBDC






GDP




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







GDP
CBDC






-
https://www.noormags.ir/view/fa/articlepage/1523841

-
https://doi.org/10.30495/jae.2022.66593.1411

DSGE-
https://ecoj.tabrizu.ac.ir/article_9127.html

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