Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting.

We develop a DSGE model with cash deposits and digital currencies to study the economic stability of two potential central banking policies in China, a Loan Prime Rate (LPR) policy function and central bank digital currency (CBDC) implementation. We Bayesian-estimate both a benchmark model and a "Post-CBDC world". In the post-CBDC world, although the introduction of CBDC appears to deepen the procyclicality of macroeconomic variables to real shocks, a potential LPR-setting policy appears to have some degree of policy complementarity with CBDC to mitigate this. We also uncover an optimal policy combination of the LPR rule and Taylor-style CBDC rule. • A DSGE policy experiment between current versus post-CBDC world in China. • Macroeconomy displays a greater procyclicality to shocks in the post-CBDC world. • A potential LPR-setting policy improves stabilization in the post-CBDC world. • An optimal LPR policy function should target more on housing and capital markets. • An optimal LPR policy function should also target more on the growth in CBDC. [ABSTRACT FROM AUTHOR]