An Environmental DSGE Model of DCash for Payment System and Natural Disaster in the Eastern Caribbean Currency Union

This paper develops an environmental Dynamic Stochastic General Equilibrium Model of Central Bank Digital Currency to assess the role of the Eastern Caribbean Currency Union Digital Currency on the resilience of the payment system to natural disaster. Our paper provides relevant contributions to advance both the empirical and theoretical literature around the nascent subject. First, this paper set-up a macro- structural model that reproduces stylized dynamics of natural disaster consequences on the payments system while taking into consideration the current digitalization of the currency union. Second, the stochastic properties of the model also make it suitable for the analysis of the payment system impact of natural disasters given the explicit modeling of both the near-term dynamic responses and the long-run equilibrium under natural disasters. Third, we estimate the model with data from the Eastern Caribbean Economic and Currency Union to study how natural disaster patterns across the currency union’s payment system can be changed by the issuance of a central bank digital currency. Fourth, we show that monetary policy that embraces digitalization can be effective in enhancing the resilience of the payment system to natural disaster. Against this background, we determine the equilibrium where payment settlement in each sector of production (agriculture or tourism) optimally benefits from central bank DCash policies following the natural disaster. We show that such equilibrium is characterized by an inadequate payment system resilience when the central bank relief targets uni- laterally each sector. By contrast, when the Central Bank DCash policy affects both sectors of production, monetary policy can attain the appropriate resilience of the payment system to natural disaster. This resulting resilience of the payment system can ensure that the central bank DCash relief policy is also welfare compatible. Finally, our framework could be useful to address some issues on finance digitalization and climate change that have become relevant in the current international debate.