Monetary policy in the age of central bank digital currencies: Revisiting price and quantity instruments

Central bank digital currencies (CBDCs) reshape how monetary policy influences the economy, requiring a rethinking of traditional tools. Hence, this paper investigates the implications of CBDCs for monetary policy design within a New Keynesian dynamic stochastic general equilibrium (DSGE) framework. The analysis compares the macroeconomic consequences of quantity-based monetary policy (QMP) and price-based monetary policy (PMP) shocks in a closed economy where CBDC functions as an interest-bearing instrument. Impulse response functions indicate that PMP leads to faster convergence to the steady state and reduced volatility relative to QMP, which produces larger fluctuations and longer stabilization periods. Furthermore, the effectiveness of monetary policy depends on the usability of CBDC: higher substitutability with cash amplifies CBDC demand and alters money holdings. These findings suggest that CBDC-issuing central banks should continue to favour interest rate adjustments, whether on reserves or CBDC, over managing the quantity of CBDC in circulation.