Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting

King Yoong Lim, Chunping Liu*, Shuonan Zhang

*Corresponding author for this work

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Abstract

We develop a DSGE model with cash deposits and digital currencies to study the economic stability of two potential central banking policies in China, a Loan Prime Rate (LPR) policy function and central bank digital currency (CBDC) implementation. We Bayesian-estimate both a benchmark model and a “Post-CBDC world”. In the post-CBDC world, although the introduction of CBDC appears to deepen the procyclicality of macroeconomic variables to real shocks, a potential LPR-setting policy appears to have some degree of policy complementarity with CBDC to mitigate this. We also uncover an optimal policy combination of the LPR rule and Taylor-style CBDC rule.

Original languageEnglish
Article number101108
JournalEmerging Markets Review
Volume59
DOIs
Publication statusPublished - Mar 2024

Keywords

  • Bayesian DSGE models
  • China
  • Digital currency
  • Loan prime rate
  • Monetary policy

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Lim, K. Y., Liu, C., & Zhang, S. (2024). Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting. Emerging Markets Review, 59, Article 101108. https://doi.org/10.1016/j.ememar.2024.101108