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What do you think about the adaptation of asset pricing models to CBDCs?

I can read some studies on asset pricing models with cryptocurrencies. But I cannot find anything about the asset pricing model with CBDCs. Why does not exist? And, is it possible to conduct a study on this model with CBDCs?

(Asset pricing models could be CAPM or Lucas asset pricing model or other models, no matter which model is)

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I can read some studies on asset pricing models with cryptocurrencies. But I cannot find anything about the asset pricing model with CBDCs. Why does not exist?

Asset pricing models would not work well to model behavior of CBDCs.

Asset pricing models are used for cryptocurrencies because there is research that shows that cryptocurrencies behave more like speculative asset rather than money and that is primarily because it is highly debatable whether bitcoin or other cryptocurrencies can be considered means of exchange given that number of payments facilitated by bitcoin is trivial. To be clear, this is not settled question, and some economists do consider it to be money, but enough economists consider bitcoin to be just risky asset (e.g. Yermack 2015) that it makes sense to use asset pricing models to model bitcoin prices.

CBDC's are supposed to initially just replace current deposits (which are part of M2), meaning instead of having deposit account you would have some 'wallet' connected central bank, and later as cash is phased out they will replace money completely. Asset pricing models are not built for predicting or forecasting regular exchange rate. They are build for prices of stocks, commodities like gold etc. Things that people invest in with expectation of return. That is generally not why people hold money. People primarily hold money balances so they can settle their transactions, not as means of investment.

If you would want to model behavior of CBDCs or its exchange rates you would likely do better just using standard exchange rate models that people use for currency now. When CBDCs are introduced it won't be as new currency but as a replacement for current one, and privacy issues aside, there won't be any significant difference between way how the money works now.

And, is it possible to conduct a study on this model with CBDCs?

In principle you can use asset pricing model to model exchange rate since currency is technically an asset, but I highly doubt you will get better results with it than with models that are specifically tailored to this task.

You can try it out by using asset pricing models to model present currencies, if it won't work with current fiat currencies, it won't work with CBDCs which will be just technologically more sophisticated version of fiat money. Private fiduciary money (e.g. bitcoin) is another matter as explained in first part.

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  • $\begingroup$ Thank you so much for your great explanation. Well, according to you, which theoretical macro/finance models I should focus on in order to study on CBDCs? For example, the effect of CBDC on financial sectors and monetary policy, the liquidity effect with digital money, etc? $\endgroup$
    – studentp
    Apr 3, 2023 at 0:18

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