Central Bank Digital Currency Adoption and the Effectiveness of Monetary Policy

Theoretical work has analysed the implications of introducing a central bank digital currency (CBDC) to monetary operational framework and its subsequence economic outcomes, yet empirical work that quantifies the transmission mechanism remains limited. This paper investigates the impacts of CBDC adoption on the effectiveness of monetary policy. Ussing a quarterly panel data set covering 54 countries from Q1 2014 to Q1 2025, we find that CBDC adoption significantly increases the effect of money supply on output by approximately 57% in the first quarter, followed by accelerated inflation in the third quarter. Our results are robust to a series of sensitivity checks, including the augmentation of different types of fixed effects, exclusion of crisis period and the use of an alternative CBDC adoption measure. Additional analyses show the moderating effect of CBDC on monetary transmission is more pronounced for developing economies compared to advanced ones and if the CBDC is in retail form as opposed to wholesale. Our results help inform central banks' CBDC adoption decision and the calibration of monetary policy targets.