Macroeconomics implication of central bank digital currency: case of Indonesia

Purpose The paper aims to examine the implications of central bank digital currency (CBDC) for the Indonesian macroeconomics. It proposed simulation modeling and outlining feasibility of CBDC for the financial inclusion tool. The purpose of the study is to determine how CBDC affects the Indonesia’s macroeconomics variables. Design/methodology/approach The paper uses Dynamic Stochastic General Equilibrium (DSGE) that include both financially included and financially excluded household to see the impact of CBDC on the monetary and fiscal policy implications, using case study of Indonesia. Descriptive analysis of the present state of financial inclusion in Indonesia was included to the data. Findings Empirical results suggest that CBDC has potential as a financial inclusion tool. The CBDC interest rate hike reduced output and inflation. Consequently, monetary policy in the post-CBDC period is more effective than the pre-CBDC period, due the financially excluded households are more responsive to monetary policy. CBDC also lessens the vulnerability of financially excluded households to economic shocks caused by increases in labor income tax, consumption tax and productivity. However, after the CBDC, government expenditures became increasingly ineffective. Research limitations/implications This study excludes the financial sector block. Instead, the model assumes that the CBDC interest rate is lower than the deposit rate. Therefore, the deposit should not be displaced as a source of commercial banking credit. This research might be expanded by incorporating the financial industry and looking into the impact of CBDC on the financial sector intermediation process. Practical implications This study contributes to the CBDC literature discussing the debate on the impact of introducing a CBDC on macroeconomic variables by developing and estimating a closed economy DSGE model. The paper also examine the impact of CBDC on heterogeneous households, both financially included and excluded households. Research involving financially excluded households is essential to see whether the motivation of emerging countries to use CBDC as a means of financial inclusion can help people who do not have access to formal financial institutions to perform consumption smoothing when a shock occurs in the economy. Originality/value This paper addresses recognized research need to study how CBDC could enhance financial inclusion.