CENTRAL BANK DIGITAL CURRENCY, MONETARY POLICY, AND MACROECONOMY: EVIDENCE FROM INDONESIA

Abstract

This paper studies the impact of a universally accessible interest-bearing Central Bank Digital Currency (CBDC) on macroeconomic stability and monetary policy in Indonesia. We construct a simple reduced-form New Keynesian model calibrated with monthly data for Indonesia from July 2005 to February 2022. We find that the CBDC regime significantly improves macroeconomic stability in Indonesia. In this regard, the CBDC rate, as an additional monetary policy instrument, responsively reacts to macroeconomic fluctuations and significantly impacts the demand side. Our results also suggest that monetary policy is more effective under the CBDC regime than under the non-CBDC.