Page 102 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.82, # 2, 2025, pp. 96-116

3. Issuance / redemption: SDC is issued on demand at par and freely redeemable for
central-bank liabilities (no frictions in issuance/redemption in the baseline).
Operational constraints and KYC/AML can be modeled via holding caps or tiering
(see below).

4. Tiering / holding limits: To capture pragmatic policy choices we model a simple
tiered remuneration rule: households earn on SDC holdings up to ; balances

above earn ≤ . Tiering is used in comparative statics to show how caps
mitigate deposit substitution.

5. Cross-border usability: Baseline assumes limited cross-border use (a small
parameter ψ captures foreign demand). We run sensitivity experiments with larger
ψ to show spillovers when the SDC becomes internationally attractive.

Monetary policy rule
We represent the central-bank policy instrument it with a standard partial-adjustment
Taylor rule augmented by a financial-stability term and persistence:

= + (1 − )( + + ) + , (6)
−1

where is inflation, the (log) output gap, and a short-run financial-stability

indicator (we use the bank spread or the credit gap as stand-ins). Baseline numerical
values are = 0.80, = 1.50, = 0.50, = 0.25; we report sensitivity to

in Section 5.

The central bank can also set (SDC remuneration) independently; welfare

experiments treat as an operational parameter. When we report “remuneration near

the policy rate” we refer to approaching in steady state.

Central-bank balance-sheet and recycling
In nominal terms the central bank balance sheet satisfies

= + , (7)

where denotes outstanding SDC liabilities, denotes central-bank assets

(government bonds and foreign reserves) and denotes other liabilities (reserves,

capital). We introduce a recycling parameter γ in [0,1] that captures the fraction of net
SDC inflows the central bank uses to (i) purchase assets or (ii) extend targeted lending
that restores bank funding. Operationally, γ = 0 denotes no offset (full
disintermediation) while γ = 1 denotes full offset of flows into SDC (no net funding
loss to banks).
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