Bitcoins and Central Bank Digital Currency in a Simple Real Business Cycle Model

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 gen-erate 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 effect 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.