The co-effects of technology innovation and digital infrastructure on central bank digital currency: A DSGE analysis

Abstract

The Central Bank Digital Currency (CBDC) stands at the forefront of financial innovation, intertwining with the coevolution of technology innovation and digital infrastructure. Despite their significance, the co-effects of technology innovation and digital infrastructure on the evolution and efficacy of CBDCs remain underexplored. This study introduces a dynamic stochastic general equilibrium (DSGE) model that encapsulates various economic agents, including households, firms in different stages, financial institutions, and policy authorities, to simulate real-world interactions and policy implications. We uncover a non-linear relationship between CBDCs and traditional banking deposits, challenging and reconciling disparate views in the existing literature. The study reveals that while CBDCs can potentially enhance macroeconomic stability and efficiency in the short term, their long-term impact is contingent upon sustained technology innovation and robust digital infrastructure. These findings offer nuanced insights into the co-evolutionary process of financial mechanisms and technological progress, providing a theoretical foundation for policymakers to navigate the complex dynamics of introducing CBDCs within the digital economy. This research not only bridges a critical gap in financial innovation literature but also charts a course for future empirical investigations into the broader economic ramifications of CBDC implementation.