Central bank digital currency: Payment choices and commercial bank profitability

Jaemin Son, Doojin Ryu and Robert I. Webb

International Review of Financial Analysis, 2023, vol. 90, issue C

Abstract: This study examines how the issuance of a central bank digital currency (CBDC) affects consumers' payment instrument choices, asset allocation decisions, and the profitability of financial intermediaries. Specifically, we advance a theoretical model in which introducing an interest-bearing CBDC expands market participants' payment and investment options but also poses a potential threat to financial intermediaries if it raises their borrowing costs significantly. The existence of a network externality further complicates the analysis by affecting consumers' choice of payment mechanism. Our results suggest that the issuance of a CBDC is a double-edged sword for an economy. Although it provides additional payment and investment options for market participants, it increases competition and weakens financial intermediaries' margins.

Keywords: Central bank digital currency; Financial stability; Interest rate; Payment instrument (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003903

DOI: 10.1016/j.irfa.2023.102874

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