Impact of central bank digital currency uncertainty on international financial markets

Abstract

Is the impact of central bank digital currency (CBDC) uncertainty on investment and financial stability significant? To address this pivotal question in the era of CBDC development, we employ a combination of models: the time-varying parameter vector autoregression with stochastic volatility (TVP-SV-VAR); the Baba, Engle, Kraft, and Kroner multivariate generalized autoregressive conditional heteroskedasticity (BEKK-MGARCH) model, and wavelet quantile correlation (WQC) analysis. Based on the findings, macrofinancial variables significantly respond to CBDC uncertainty shocks, exhibiting time-varying, heterogeneous, and stage-specific characteristics. These effects are most pronounced in the short term, but diminish over the long term. Notably, the impact of CBDC uncertainty shocks on other financial variables exceeds the reverse impact. In addition, asymmetric volatility spillovers are found, suggesting complex interdependencies. The implication of the findings is that interactions between CBDC uncertainty and financial variables evolve across short-, medium-, and long-term horizons, emphasizing the need for central banks to adopt a flexible approach in CBDC design to alleviate market concerns and enhance overall financial stability.