Page 96 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.82, # 2, 2025, pp. 96-116

A DSGE FRAMEWORK FOR SOVEREIGN DIGITAL

CURRENCY ADOPTION IN SMALL OPEN ECONOMIES:
MACRO-FINANCIAL CHANNELS, BANK INTERMEDIATION,

AND POLICY TRADE-OFFS

Nazim Hajiyev 1,2 (Corresponding author) , Daniyar Aliyev 3

1 Department of Business Management, UNEC Business School, Azerbaijan State
University of Economics (UNEC), Baku, Azerbaijan, AZ1001
ORCID ID - 0000-0002-3093-2322, [email protected]
2 Development Economics Research Center, UNEC Business School, Azerbaijan
State University of Economics (UNEC), Baku, Azerbaijan, AZ1001
3 Elite Gymnasium, Baku, Azerbaijan, ORCID ID - 0009-0002-0891-7334,
[email protected]
https://doi.org/10.30546/jestp.2025.82.02.2021

Received: June 06; accepted October 02, 2025; published online December 16, 2025

ABSTRACT
We build a tractable small-open-economy Dynamic Stochastic General Equilibrium
(DSGE) model with monopolistically competitive banks to study the macro-financial
effects of introducing a sovereign digital currency (SDC) - here modeled as an account-
based central bank digital currency (CBDC). Households choose between bank deposits
and SDC holdings; banks finance loans largely with deposits and face a reduced-form
intermediation capacity. Mechanism — higher attractiveness of an interest-bearing
SDC mechanically substitutes away bank deposits, reducing bank funding and, absent
recycling, shrinking loan supply and lowering aggregate credit. Quantitatively, under
our baseline calibration a 10% reallocation from bank deposits into SDC implies
an≈3.2% contraction in bank lending and a consumption-equivalent welfare loss of
≈0.039% (worst-case scenarios reach ≈8.0% welfare loss when recycling is absent and
intermediation is fragile). Policy experiments show that (i) modest or tiered
remuneration on SDC, (ii) limits/tiering on holdings, and (iii) active central-bank
recycling of inflows into bank funding substantially mitigate credit and welfare losses.
Our results are robust across parameter sweeps. Policy implication — combining tiered
remuneration with credible recycling is the most effective way to preserve credit while
delivering the liquidity and payment-system benefits of SDC. Limitations — the
analysis is theoretical, uses a reduced-form banking block and illustrative calibration;
country-level empirical calibration and endogenous bank-risk dynamics are left for
future work.

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