Monetary Policy and Cryptocurrency in the Iranian Economy: A Dynamic Stochastic General Equilibrium (DSGE) Approach

Document Type : Scientific paper

Authors

1 Department of Islamic Economics, Faculty of Economics and Administrative Sciences, University of Qom, Iran

2 Associate Professor, Department of Islamic Economics, Faculty of Economics and Administrative Sciences, University of Qom, Iran

10.22080/mrl.2025.28936.2169

Abstract

This study examines the implications of introducing a Central Bank Digital Currency (CBDC) for monetary policy in an open economy, with a focus on Iran. It analyzes the interaction between monetary policy and digital currencies and explores the transmission of macroeconomic shocks—particularly oil price fluctuations and interest rate shocks—on key economic variables. The research also evaluates the macroeconomic consequences of digital currency sector expansion and offers policy recommendations for the Central Bank of Iran (CBI), including regulatory considerations and the potential issuance of a CBDC to preserve monetary policy effectiveness. To address these objectives, a Dynamic Stochastic General Equilibrium (DSGE) model based on microfoundations is employed. The model incorporates households, firms, and a central bank, featuring a utility function that includes consumption, labor, and digital currency holdings. Monetary policy is modeled through a Taylor-type rule, and simulations are conducted to assess the effects of CBDC adoption on output, inflation, and interest rates. The results suggest that while a CBDC can enhance monetary policy transmission by increasing efficiency and reducing transaction costs, it may also introduce new challenges. These include shifts in money demand and potential financial instability. The simulations show that an interest rate hike reduces inflation and output, while a negative oil price shock decreases output and raises inflation. Although digital currency adoption may stimulate production, it can weaken the interest rate channel of monetary policy due to shifts in asset preferences. This research contributes to the literature on digital currencies and monetary policy by providing empirical insights and policy guidance for central banks. It emphasizes the importance of tailored CBDC design and regulatory frameworks to safeguard macroeconomic stability in digital monetary environments.

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References

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Macroeconomics Research Letter
Volume 20, Issue 46
August 2025
Pages 107-129

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History

  • Receive Date: 06 April 2025
  • Revise Date: 31 May 2025
  • Accept Date: 21 July 2025

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