Readiness to introduce digital currency: is the central bank independence important?

Abstract

The paper put forward the hypothesis suggesting that central bank’s advances on the way of CBDC projects depend on the level of their independence. At the same time, the theory demonstrates some ambiguity of how to interpret independence in respect of CBDC involvement especially in the case of empirical tests because indexes of central banks independence are tailored to the assessment of relations between monetary authorities’ status and inflation. A high level of the central bank independence index rank may mean a narrow focus on monetary policy, while a low level of independence may mean a lack of resources to be allocated to execute the innovative projects. To avoid such theoretic ambiguity in the empirical test the linearly and quadratic functions are applied in the case of the central bank independence proxy. Such proxy is added by proxies for economic development, innovations and financial development. The role of political regimes is also examined. The empirical results show that the intermediate central banks independence level might play the role in how deeply central banks are plunged in CBDC projects. The Intermediate level is interpreted as a situation when central banks operate with enough financial independence to realize innovative projects but scope of responsibilities goes beyond a narrow focus on monetary policy. But central banks status proxy is valid in the multivariate regression. The most statistically significant driver of advances toward CBDC is financial development. Proxy for innovations is valid only in the univariate regression. In the case of multivariate regression the innovation capacity of the country is less important than financial development and central bank’s status.

What do cross-country Bitcoin holdings tell us? Monetary and institutional discontent vs financial development

“…In other words, given the risks of financial shock, which in less developed countries is more likely to provoke higher inflation, devaluation and financial instability, "slipping" into an asset that still allows for cross-border transactions may be considered a rational choice. Koziuk (2021b) noted that trust in centralized and privately issued digital currencies differs in terms of inflationary experience and monetary confidence. The results of the paper confirm that, despite progress in reducing inflation in many countries, economic agents continue to look for toolkits to inflation hedge precisely in the context of how sustainable they view the institutional framework for central bank price stability credentials.…”

CBDC, Trust in the Central Bank and the Privacy Paradox

“…Koziuk, 2021aKoziuk, , 2022 notes that central bank independence plays an important role in creating an environment of trust in digital currency, and institutional distortions in monetary processes affect the popularity of private cryptocurrencies. At the same time, Koziuk, 2021b shows that the progress of CBDC implementation is more likely related to the average level of central banks independence, and the political regime matters in terms of the extent to which transaction traceability can become a tool of political control and social selection. Pfister and de Seze, 2023 also make similar caveats based on an analysis of e-yuan design.…”

“…As already mentioned, in several works, respondents' probability of choosing a CBDC was positively correlated with trust in the central bank (Abramova et al, 2022. Also notable is the attention to the issue of central bank independence and CBDC design, the agreement between design and the ability to enforce control over society (Koziuk, 2021b, Pfister and de Seze, 2023, Tsang et al, 2023. An extremely important institutional conclusion emerges from the literature on the functional efficiency of central banks.…”