Page 98 - Azerbaijan State University of Economics

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

gains. The remainder of the paper is organized as follows: Section 2 reviews the
literature; Section 3 sets out the model; Section 4 derives equilibrium conditions and
steady states; Section 5 presents the calibration and numerical experiments; Section 6
reports analytical results and welfare implications; Section 7 contains robustness
checks and extensions; Section 8 discusses operational considerations; Section 9
provides policy takeaways; Section 10 concludes. Appendices A–C provide full
derivations, numerical methods and compact extensions.

Why a small open economy? Small open economies are especially sensitive to deposit
substitution because of shallower capital markets and higher deposit reliance; treating
the world rate as exogenous allows us to focus on exchange-rate and capital-flow
channels that amplify SDC adoption effects.

LITERATURE REVIEW
The paper contributes to three strands of literature: (i) the theoretical DSGE literature
on central-bank digital currencies and their macroeconomic effects, (ii) the literature
on bank intermediation, deposit substitution, and financial stability, and (iii) work on
small open economies, capital flows and exchange-rate transmission that motivates
our calibration and policy focus.

DSGE and theoretical CBDC literature.
A growing theoretical literature introduces central-bank digital currencies (CBDC /
SDC) into New Keynesian and monetary frameworks to quantify trade-offs between
liquidity services and bank disintermediation. Early quantitative DSGE contributions
include Barrdear and Kumhof (2016), who study the macroeconomic consequences
of a universally accessible, interest-bearing CBDC, and Fernández-Villaverde et al.
(2021), who analyze the design trade-offs and stability implications of CBDC in
dynamic settings.

Keister and Sanches (2021) formalize the trade-off that CBDC brings greater payment
efficiency but may crowd out bank deposits and hence lending; they provide
conditions under which a CBDC is welfare-improving. Several recent papers extend
this framework by explicitly modeling banks’ balance sheets, collateral frameworks,
and optimal central-bank responses (see Barrdear & Kumhof, Keister & Sanches, and
related work).

More recent quantitative work provides welfare and policy rules in calibrated DSGE
settings. For example, Burlon, Muñoz and Smets (2024) use a DSGE model calibrated
to a large advanced economy and find a non-trivial welfare-maximizing CBDC size
(their baseline range is 15–45% of quarterly GDP), highlighting the importance of
collateral and central-bank balance-sheet choices for policy design.

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