- Assessing the Impact of Central Bank Digital Currencies on Cross-Border Settlements and Monetary Policy Transmission in Emerging Markets

Project Abstract

This study investigates how Central Bank Digital Currencies (CBDCs) influence cross-border settlements and the transmission of monetary policy in emerging market economies, with a focus on operational mechanisms, cost efficiency, financial inclusion, and systemic stability. Using a mixed-methods approach, the research combines a macroeconomic structural model with a granular analysis of payment-system data from a selected group of emerging markets that have launched or piloted CBDCs. The theoretical framework integrates monetary policy transmission channels—exchange rate pass-through, asset prices, liquidity conditions, and banking system risk—within a CBDC-enabled multi-tier architecture that differentiates between retail and wholesale CBDCs, as well as on-ledger versus off-ledger settlement dynamics. The study also examines regulatory and supervisory implications, interoperability challenges, and the role of cross-border liquidity management facilities in shaping settlement timelines, settlement finality, and settlement risk. Empirically, the research leverages scenario simulations and counterfactual analysis to quantify potential gains in settlement speed, reductions in settlement and correspondent-banking costs, and improvements in cross-border liquidity risk management under different CBDC configurations. It assesses transmission outcomes by analyzing how CBDC-induced changes in monetary policy instruments (policy rates, reserve requirements, and quantitative easing frameworks) alter the composition and behavior of domestic credit channels, inflation dynamics, and capital flow volatility. The analysis accounts for heterogeneity across institutions, including central banks, commercial banks, payment-service providers, and non-bank financial intermediaries, with particular attention to financial inclusion, unbanked populations, and SME access to cross-border payment rails. Key findings suggest that wholesale CBDCs can significantly streamline cross-border settlements by reducing layers of correspondent banking, thereby lowering settlement times and FX conversion costs, while retail CBDCs offer enhanced financial inclusion but require robust cybersecurity and privacy safeguards to avoid disintermediation risks. The study identifies critical governance and risk management requirements, including interoperability standards, cross-border regulatory cooperation, and standardized KYC/AML procedures, as essential for achieving stable monetary transmission in a CBDC-enabled environment. Policy implications highlight the need for gradual, well-coordinated pilots, data-driven calibration of liquidity facilities, and international cooperation to harmonize technical standards and avoid fragmentation. The research contributes to the literature by providing a comprehensive assessment of the micro- and macro-level effects of CBDCs on cross-border payment ecosystems and how these effects propagate through monetary policy channels in emerging markets. It offers a framework for central banks to design CBDC architectures that optimize efficiency and resilience while safeguarding financial stability and inclusive growth. The study also outlines a set of actionable recommendations for policymakers, regulators, and banking sector participants to navigate the transition toward CBDC-enabled international settlements.

Project Overview

What This Project Is About

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A plain-language overview of how digital forms of money issued by a central bank might change how money moves across borders and how governments influence the economy, especially in developing countries. It explores how central bank digital currencies (CBDCs) could affect cross-border payments, exchange of currencies, and the way monetary policy works when countries are interconnected.

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The Problem It Addresses

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Cross-border payments are often slow, costly, and opaque. There is debate about whether CBDCs can make these payments faster and cheaper while preserving financial stability. In emerging markets, shifts in policy transmission and payment systems could have wide effects on inflation, exchange rates, and financial inclusion.

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Objectives of the Project

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1. Explain what CBDCs are in simple terms and how they differ from traditional money.
2. Identify potential benefits and risks of CBDCs for cross-border settlements.
3. Analyze how CBDCs could change the way monetary policy influences the economy in emerging markets.
4. Assess what data and governance are needed to make CBDC systems safe and fair.
5. Suggest practical considerations for regulators and banks in adopting CBDCs.

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What You Will Do Step by Step

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1. Review plain definitions and current CBDC experiments in a selection of emerging markets.
2. Compare current cross-border payment systems with CBDC-enabled options.
3. Map how monetary policy signals could travel through a CBDC-based system.
4. Identify key safety, privacy, and inclusion issues.
5. Propose a simple framework for evaluating CBDC pilots.

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Expected Outcome

A clear, user-friendly outline of how CBDCs might influence cross-border settlements and policy transmission, plus practical guidance for policymakers and financial institutions on next steps and considerations.