Page 107 - Azerbaijan State University of Economics

Nazim Hajiyev, Daniyar Aliyev: A DSGE Framework For Sovereign Digital Currency
Adoption in Small Open Economies: Macro-Financial Channels, Bank Intermediation, and
Policy Trade-Offs

Proposition 2 (Disintermediation vs lending). The net effect of SDC introduction
on aggregate lending depends on γ (recycling), θ (intermediation capacity), and bank
market power. There exists threshold such that if ≥ SDC introduction does
∗
∗
not reduce lending; if < lending contracts. (Sketch: see equation (10).)
∗

Proposition 3 (Welfare). There exist parameter regions where SDC increases welfare
(liquidity gains dominate intermediation loss) and regions where SDC reduces welfare
(credit contraction dominates). Borderline conditions depend on deposit
substitutability and the monetary policy reaction; optimal SDC remuneration can

be computed by maximizing the social welfare functional subject to equilibrium
constraints. (This mirror results in Burlon et al., 2024.)
Exchange-rate and capital-flow amplification
In the small open economy, SDC adoption can alter capital flows through two
channels: (i) an SDC that is attractive to foreign investors generates capital inflows
and an appreciation pressure; (ii) SDC-induced domestic deposit outflows to SDC-
like offshore instruments (if cross-border) can create volatility. The UIP condition (7)
implies exchange-rate responses feed back into net exports and loan collateral
valuations, amplifying the initial SDC shock.

Design levers: remuneration and tiering
Analytical comparative statics show:
● Remuneration : Low (zero or slightly negative relative to policy) limits

deposit outflows but reduces SDC attractiveness; moderate positive can increase
welfare by disciplining bank market power (if banks had significant markups), but

excessively high causes strong deposit flight and lending contraction.
● Tiering / caps: Imposing holding limits or tiered remuneration (higher amounts
receive lower or zero interest) bounds displacement of deposits and reduces the
probability of large disintermediation episodes.
● Recycling γ: A credible recycling commitment is the most effective central-bank
instrument to offset credit loss, but it comes with fiscal and operational trade-offs
(central bank expansion of balance sheet, potential moral hazard).

WELFARE ANALYSIS AND POLICY RULES
We compute welfare as the expected discounted utility of the representative
household, including consumption volatility and credit availability effects (detailed in
Appendix B). The social planner internalizes intermediation externalities and chooses
, tiering, and maximizing welfare subject to feasibility.

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