Central Bank Digital Currency and Balance Sheet Policy

Martina Fraschini, Luciano Somoza and Tammaro Terracciano
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Martina Fraschini: University of Lausanne, HEC; Swiss Finance Institute
Luciano Somoza: University of Lausanne, HEC; Swiss Finance Institute
Tammaro Terracciano: University of Geneva, GFRI; Swiss Finance Institute

No 21-25, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper studies a stylized economy in which the central bank can hold either treasuries or risky securities against central bank digital currency (CBDC) deposits. The key mechanism driving the results is the reduction in bank deposits that follows the introduction of a CBDC and its impact on the banking sector. With CBDC funds invested in treasuries, the central bank channels funds back to the banking sector via open market operations and the introduction of a CBDC is neutral, consistently with the equivalence theorem of Brunnermeier and Niepelt (2019). However, it is not neutral when accounting for liquidity requirements, quantitative easing, or for CBDC deposits held against risky securities. We reach two main conclusions. First, current monetary policy regimes do matter for CBDC equilibrium effects. Second, there is a trade-off between bank lending to the economy and taxes, as holding risky assets against CBDC deposits leads to lower expected taxes and lower bank lending.

Keywords: CBDC; central banking; monetary policy; QE (search for similar items in EconPapers)
JEL-codes: E4 E5 G2 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021-03
New Economics Papers: this item is included in nep-acc, nep-cba, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2125

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