DIGITAL CURRENCY: IMPACT ON CHINA’S MONETARY AND FISCAL POLICIES

Abstract

This study analyzes the impact of digital currency on China’s monetary cost, money demand and supply, efficiency of tax collection and tax revenue growth rate. This study reveals that the evolution of the digital currency will reduce the demand for cash; can increase the money multiplier, which helps increase the money supply; and has a positive effect on the efficiency of tax collection and helps increase the tax revenue growth rate. Particularly, by dividing digital currency into card- and network-based, this study suggests that when the rate of digital monetization produces a positive impact, cash holding demand M0/M1 can respond negatively in the short term, and the impact is maximized within 1–3 periods (within one year), which lasts for a long term. The development of digital currency can increase the money multiplier, and the rates of both card- and network-based digital monetization are the Granger causes of the generalized money multiplier. When the change in digital monetization rate [D(EM1) and D(EM2)] generates a positive impact of standard deviation, the month-on-month growth rate of tax revenue in a given quarter can produce a positive reaction in the short term and improve the overall efficiency of tax collection. Key words: Digital Currency, Monetary Policy, Fiscal Policy, Money Multiplier, Cash, Tax