VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS FACULTY: FINANCE — BANKING TOPIC: CENTRAL BANK DIGITAL CURRENCY AND THE SPILLOVER OF MONETARY POLICIES Supervisor Lecturer: MSc. Luong Tram Anh Student: Nguyen Thi Hoai Student ID: 20050443 Ha Noi, 2023 DECLARATION. I hereby declare that this thesis is my own work. Survey data, calculations and result in the thesis are truthful and have never been published by anyone in any other work and effort as well that it has not been submitted anywhere.
Where other sources of information have been used, they have been acknowledged. The reference to source material has been made citing and referencing in accordance with the faculty’s regulations Hanoi, 2023 Confirmation of instructor Confirmation of student MSc. Luong Tram Anh Nguyen Thi Hoai ACKNOWLEDGEMENTS A completed study would not be done without any assistance. Therefore, the author who conducted this research gratefully gives acknowledgement to their support and motivation during the time of doing this research as a requirement of completing my thesis.
The author would like to thank the Board of the University of Economics and Business — Vietnam National University for creating favorable conditions for the author to complete this thesis. The author also would like to thank the lecturers of the Faculty of Finance and Banking, University of Economics and Business — Vietnam National University for their help the author in the thesis implementation process. In particular, I would like to express my endless thanks and gratefulness to my supervisor MSc. Luong Tram Anh.
Her kindly support and continuous advice went through the process of completion of my thesis. Her encouragement and comments had significantly enriched and improved my work. Without her motivation and instructions, the thesis would have been impossible to be done effectively. Thank you very much! Ha Noi, 2023 TABLE OF CONTENTS LIST OF ABBREVIATION.
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c5 << S4 9519515515595 95 21 CHAPTER 3: RESEARCH METHODOLOGY. Researsign (Ì€SÏØTA. Data COÏÏ€CẨÏOIA. Measures for Monetary Policy - Shadow short rate estimafe.
Data for CBDC Uncertainty. Time-varying parameter vector autoregressions (TVP-VAR) based CONNECLEUNESS APPTOACH. TT ọ TH TH T00 32 CHAPTER 4: RESULT AND DISCUSSION .- co GSĂ HH 910616665 33 4. The international spillover of monetary Policies.
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55 << 5< «5s s5 se 47 LIST OF ABBREVIATION Terms Explain CBDC Central bank digital currencies SSR Shadow short rate TCI Total connectedness index CBDC_UI Central Bank Digital Currency Uncertainty Index GFEVD Forecast error variance decomposition TVP-VAR Time-varying parameter vector autoregressions GPR Geopolitical risk index EPU The Economic policy uncertainty OLS Ordinary least squares VIF Variance Inflation Factor LIST OE TABLES Table 2.1: Definition of CBDCC. Descriptive statistic of Shadow short raf(©S. Average connecfedness MEASULE .2: Descriptive sfafÏS(ÏCS. - - c c c9 Ơn 9n SH SỰ HH SH Họ 1 9Ý 1 0V 00808 41 Table 4.4 Variance Inflation Factor.
<< << c1 1 11 15 55 43 E(11441///44/4/4//4/1344441//4411/4///414/4//3//4/14/1//13/1//31414444/441/4/44/4//4444//4/441144//4/ v13 44 LIST OF FIGURES Figure 3.1 Dynamic total connecfedness .- - - - < - s2 n9 9n S9 9 5 99H 9 9H K9 Vi n1 1 V940 CHAPTER 1: INTRODUCTION 1. The urgency of the topic Technological innovation is rapidly shifting people’s lifestyles. The rapid digitization of the world has made it clear that traditional money needs to be replaced with alternatives. The advent of cryptocurrency has raised concerns among central banks worldwide.
If such cryptocurrencies gain additional market shares, monetary policy transmission and monetary sovereignty could be impaired (ECB, 2020). In response to such concerns, central banks around the world are increasingly looking into the possibility of issuing their own digital currencies — the central bank digital currencies (CBDC) (Cheng, 2022; He, 2018). This type of currency is a digital form of traditional fiat currency that is issued by a central bank. CBDC is commonly designed to co-exist with physical forms of currency and is expected to provide additional benefits such as improved security, greater efficiency, and lower transaction costs (PBOC, 2021; Xu et al.
By December 2022, 130 countries have conducted their explanatory CBDC research;21 countries have developed and tested their CBDC in a real environment and 11 have already launched their CBDCs (Atlantic Council, 2023). A CBDC is considered a Financial innovation to impact and improve the effectiveness of monetary policy (Mohammad et al. CBDC appears as a tool to help countries monitor economic activities as well as limit bribing at local officials levels, becoming a transmitting monetary policy channel (McKinsey, 2023). CBDCs can improve monetary policy transmission and effectiveness by allowing the central bank to implement negative interest rates or helicopter money more easily and directly.
As an emerging form of currency, the issuance and circulation mode of CBDC is essentially different from that of traditional paper currency and electronic currency. Compared with traditional currency, it has features and advantages such as stability, convenience, low cost, universality, programmability, liquidity, and security, and is becoming a trend of currency development. While it brings convenience to people, it also has an obvious impact on the economy, among which the impact on monetary policy is the first. The central banks of major economies have responded to this innovation by introducing a range of monetary policies.
As a result, many central banks have turned to unconventional monetary policy tools, such as quantitative easing and forward guidance, to provide additional support to their economies. One of the challenges faced by policymakers in this environment is assessing the effectiveness of their monetary policies. One way to evaluate the effectiveness of monetary policies is to examine the impact of CBDC on the co-movement among monetary policies. The spillover of CBDC on the co-movement among monetary policy is an important research question because it can help us understand the degree to which monetary policies have been impacted on the coordinated across major economies.
If there is a high degree of CBDC impact on the co-movement among short shadow rates, it could suggest that CBDC volatility have highly Implications for monetary policy. If there is low degree. Although the impact of digital currency on monetary policy has been widely concerned by the central banks, academia, and industry since its emergence (Fung et al., 2016; Broadbent B, 2016; Bjerg O et al., 2018; Armelius H et al., 2019) , the relevant studies are not specific enough. There are several gaps in the existing literature that this study aims to address.
First, most studies have focused on research and discussions revolve around a fundamental qualitative analysis of the CBDC, its technological innovations, and its regulatory framework. These studies don't give any attention to the question of how regulators and volatility about the CBDC may affect the monetary policies particularly through interest rate channels. Moreover, many studies cannot objectively reflect the actual situation of CBDC issuance and circulation. Second, most studies have focused on developed economies of countries with CBDC, rather than examining the co- movement among short shadow rates in a broader range of countries.
Finally, most studies have examined the impact of CBDC on the co-movement among short shadow rates in particularly country (Jiemeng Yang etal., 2022; Dyah Tiara et al., 2022), rather than examining whether this level has more scope of countries in the world. Therefore, as the circulation of CBDC is about to expand, in-depth research of the impact of CBDC on monetary policy has important theoretical and practical significance for the central bank to regulate the amount of digital currency issued, flexibly use and innovate monetary policy tools, dredge the transmission channel of monetary policy, and then improve the effectiveness of monetary policy. This study aims to fill these gaps in the literature by examining analyze the impact of CBDC on the central bank’s monetary policy from transmission mechanism interest rate, beside this thesis will examine the co-movement among short shadow rates. Specifically, I will examine the extent to which monetary policies have moved together across different regions, and whether this co-movement has persisted over time.
Our analysis will contribute to a better understanding of the effectiveness of monetary policies and provide insights into the degree impact of CBDC on the coordination among central banks Research on the subject matter is both timely and necessary to aid global economic and financial challenges facing policymakers and all stakeholders of eco- nomic and financial stability. This study in order to get some meaningful and enlightening conclusions, and provide a reference for the central bank to issue digital currency in the future 1.2 Objectives of the study The research objective of this graduation thesis is to examine the impact of CBDCs on the co-movement among short shadow rates of countries in research scopes. Specifically, the thesis aims to investigate whether the short shadow rates of different countries moved together, and if so, to what extent. This analysis could provide insights inform policymakers on how to respond to similar events in the future.
To achieve this objective, the thesis may use econometric techniques to analyze timeseries data on CBDC uncertainty index and short shadow rates from various countries. The study may also consider factors such as changes in monetary policy and macroeconomic conditions that could have influenced the impact of CBDC on the co- movement of short shadow rates. Overall, the research objective of this graduation thesis is to contribute to our understanding of short shadow rates behaved and how CBDCs spillover on that 1.3 Tasks of the study Organize the theoretical underpinnings of Central bank digital currency and the spillover of monetary policies 10 Collecting information, data, assess, examine, and test the Volatility Spillovers between Central bank digital currency uncertainty and the monetary policies Give advice to Government agencies on recommendations to the government agency for monitoring the fluctuations of CBDC and their impact on policies. Summarizing all obtained results and outlines directions for future research and practical implications in this field.
Research scopes The analysis uses documents of General central bank digital currency uncertainty index, monetary policies data between January 2015 - June 2023 e Scope of content: the impact of CBDC on the connectedness among short shadow rates for selected economies or regions. e Scope of space: CBDC global uncertainty; the connectedness of monetary policies among United States of America, Japan, United Kingdom, Switzerland, Canada, Australia and New Zealand e Scope of time: during the period from January Ind, 2015 to 30th June, 2023 1. This thesis plans to answer the following three research questions: e To what extent do short shadow rates co-move with each other during the research period? e How have the CBDC Uncertainty impacted on the connectedness among short shadow rates ? e What implications do the findings have for policymakers and investors? CHAPTER 2: LITERATURE REVIEW 2. Definition According to Cecchetti & Schoenholtz (2018) “Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an 11 inflation rate or monetary policy to ensure price stability and general trust in the currency.” Mishkin & Eakins (2016) define monetary policy as “Monetary policy is the management of money and interest rates by central banks to achieve macroeconomic objectives such as price stability, high employment, and sustainable economic growth”.