Impact of Central Bank Digital Currencies on Monetary Policy Transmission in Emerging Economies

Project Abstract

The rapid digitization of financial systems and the rise of Central Bank Digital Currencies (CBDCs) present transformative implications for monetary policy transmission, particularly in emerging economies where financial inclusion, informality, and dollarization pose persistent challenges. This study investigates how CBDCs influence the channels through which monetary policy decisions affect real economic activity, inflation, and financial stability, with a focus on transmission via interest rate channels, credit conditions, exchange rate dynamics, and expectations. Employing a mixed-methods approach, the research combines theoretical macroeconomic modeling with empirical analysis using a panel of emerging and frontier economies that have piloted or implemented CBDC pilots or retail CBDCs. The theoretical framework extends standard New Keynesian models by integrating a CBDC as a sovereign digital payment instrument that crowds out cash, alters payment-system efficiency, and affects risk premia, liquidity, and balance-sheet constraints of banks. The empirical strategy leverages high-frequency financial data, central bank policy rates, CBDC transaction metrics, bank lending data, and macroeconomic indicators, complemented by event-study designs around policy announcements and pilot rollouts. A key objective is to quantify the degree to which CBDCs amplify or dampen monetary policy transmission through three layered channels (i) the payment-system channel, where improved settlement efficiency reduces transaction costs and alters liquidity; (ii) the balance-sheet channel, where shifts in bank funding structures and credit supply respond to CBDC-related changes in deposit base and reserve requirements; and (iii) the confidence channel, where expectations about future policy and currency stability influence consumer and investor behavior. The study also examines potential unintended consequences, such as increased currency substitution, cyber-risks, and the distributional impact on small and medium-sized enterprises and low-income households. Using structural vector autoregressions (SVARs) and local projection methods, the analysis identifies, with robustness checks, how CBDC design features—retail vs wholesale focus, account access, tiered remedies, interest-bearing characteristics, and interoperability with existing payment rails—shape the speed and strength of monetary policy transmission. Findings are expected to show heterogeneous effects across countries, contingent on financial deepening, bank-dominated vs. market-based funding, regulatory quality, and the degree of financial inclusion. The research aims to provide policy-relevant insights on CBDC design choices that enhance policy effectiveness without compromising financial stability or fiscal sovereignty. It contributes to the literature by bridging theoretical models with granular, country-specific evidence and offering a structured assessment framework for evaluating CBDC impacts on macroeconomic stability, credit allocation, and inflation dynamics in emerging economies. Policy implications emphasize ensuring risk-based governance, cyber resilience, inclusive access, and calibrated interest-bearing features to optimize the monetary authority’s ability to achieve its dual mandate within contexts of evolving digital payment ecosystems.

Project Overview

What This Project Is About

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A plain-language overview of the topic and what the project investigates.

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The Problem It Addresses

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What problem or gap this project tackles and why it matters to the field or society.

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Objectives of the Project

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1. Identify how central bank digital currencies (CBDCs) are designed and implemented in emerging economies.
2. Explain how CBDCs could change the way monetary policy is transmitted to people and businesses.
3. Assess potential benefits and risks for financial inclusion, payments efficiency, and financial stability.
4. Suggest practical policy considerations for regulators and central banks.

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What You Will Do Step by Step

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1. Review basic concepts of monetary policy and CBDCs using accessible sources.
2. Map existing transmission channels (interest rates, credit, currency, expectations).
3. Develop simple case scenarios for an emerging economy under a CBDC regime.
4. Collect and summarize relevant data from public reports and central bank publications.
5. Analyze how access to digital currency payments might affect policy effectiveness.
6. Discuss potential policy safeguards and inclusivity considerations.

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Expected Outcome

Clear guidance on how CBDCs could influence monetary policy transmission in emerging economies, with practical implications for policymakers and a framework for evaluating future CBDC pilots.