This article examines the macroeconomic implications of central bank digital currencies (CBDCs) and private cryptocurrencies using a simple real business cycle model. The analysis explores how agents allocate their portfolios among fiat money, CBDCs and private cryptocurrencies in response to inflation shocks and technological advancements in cryptocurrency production. The model predicts that rising consumer confidence can generate inflationary pressures, prompting a shift towards private cryptocurrencies, which are insulated from inflation tax. Additionally, positive shocks in cryptocurrency production can lead to capital reallocation, reducing final goods production and causing a brief spell of recession. A central bank can remarkably counteract this recessionary effects of a crypto boom by lowering the policy rate. These findings highlight the complex interplay between digital currencies and monetary policy, emphasizing the need for strategic interventions using policy rate as a tool to balance economic stability and crypto innovation.
Citation
Basu, P. (online). Bitcoins and Central Bank Digital Currency in a Simple Real Business Cycle Model. South Asian Journal of Macroeconomics and Public Finance, https://doi.org/10.1177/22779787251338905
Journal Article Type
Article
Acceptance Date
Apr 5, 2025
Online Publication Date
Jun 10, 2025
Deposit Date
Apr 23, 2025
Publicly Available Date
Jun 23, 2025
Journal
South Asian Journal of Macroeconomics and Public Finance
