Abstract for: The Effects of CBDC on Aggregate Income Through Credit Dynamics and Household Confidence

Central Bank Digital Currencies (CBDCs) could change more than payment systems. By giving households an alternative to bank deposits, they may also affect bank funding, lending, and broader macroeconomic outcomes. This study asks how CBDC introduction works through deposit and credit channels, and how confidence and interest-rate policies shape those effects. The paper builds a stock-flow consistent macro-financial model and simulates it in a system dynamics framework. The model links households, banks, and the central bank through portfolio choice, bank funding, loan pricing, and demand for durable assets. Five scenarios are examined, covering CBDC introduction, shifts in confidence, and alternative interest-rate responses. The simulations suggest that CBDC introduction moves part of household wealth from deposits into CBDC, weakening banks’ deposit base and increasing reliance on central bank funding. Funding costs and lending rates rise, while household borrowing, durable demand, and income weaken. Lower confidence intensifies these effects, whereas policy mixes that support deposits and limit credit tightening perform better. The results point to a broader macro-financial role for CBDC than is often assumed in discussions centered on payment efficiency. Their effects depend not only on portfolio substitution, but also on confidence and on the policy rules shaping bank funding and lending. A dynamic balance-sheet perspective is therefore needed to capture these interactions.