Quantitative Easing Equivalence with Central Bank Digital Currency
Abstract
I develop a quantitative New Keynesian DSGE model with financial frictions to analyze the effects of quantitative easing policy (QE) in an economy where interest-bearing central bank digital currency (CBDC) is the only reserve and is available to all agents. In this framework, central banks implement QE by creating CBDC to expand their holdings of private equity. I examine three approaches to conducting QE in this setting: separate reserve creation, expansion through financial intermediaries, and endogenous QE. I show that expanding private equity holdings through financial intermediaries generates more expansionary outcomes. This is because such a mechanism directly relaxes borrowing constraints of financial intermediaries. Moreover, because CBDC is a "reserve for all", increasing private equity holdings through the expansion of CBDC has spillover effects on households’ money-holding decisions. As CBDC creation reduces price of money, money demand increases, further enhancing macroeconomic impact of QE.
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