Central bank digital currencies (CBDCs) amplify contractionary effects of monetary shocks, Bank of Canada (BoC) paper reveals.

In response to a traditional monetary policy shock, introducing a zero-interest CBDC tends to magnify the contractionary effects. The explanation of these effects is partly because a zero-interest CBDC raises the overall cost of liquidity, weakening the new monetarist channel that typically offsets some of the downturns in output and consumption.

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