The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through

Rodney Garratt, Jiageng Yu and Haoxiang Zhu

No 1046, BIS Working Papers from Bank for International Settlements

Abstract: Banks of different sizes respond differently to interest on reserve (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-though of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission. We explore the implications of two design features: interest rate and convenience value. Increasing the CBDC interest rate past a point where it becomes a binding floor, increases deposit rates but leads to a wider divergence of market shares in both deposit and lending markets and can reduce the responsiveness of deposit rates to changes in the IOR rate. In contrast, increasing convenience, from sufficiently high levels, increases deposit rates, causes market shares to converge and can increase the responsiveness of deposit rates to changes in the IOR rate.

Keywords: central bank digital currency; interest on reserves; payment convenience; deposit rates; bank lending. (search for similar items in EconPapers)
JEL-codes: E42 G21 G28 L11 L15 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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