A Field Guide to Monetary Policy Implementation Issues in a New World with CBDC, Stablecoin, and Narrow Banks

James A. Clouse
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James A. Clouse: https://www.federalreserve.gov/econres/james-a-clouse.htm

No 2024-001, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission. The basic model builds on that developed in Chen et. al. (2014) which, in turn, draws inspiration from the pioneering work of Tobin (1969) and Gurley and Shaw (1960). The paper focuses, in particular, on the implications of introducing new types of fixed-rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, and deposits issued by narrow banks. The analysis also provides a crude way of capturing some of the effects of bank capital and liquidity regulation on financial intermediation and monetary policy implementation. Perhaps the most important conclusion is that the introduction of new fixed-rate assets by the Federal Reserve or by other financial intermediaries can have significant effects on equilibrium interest rates and patterns of financial intermediation and may also affect the potency of monetary policy tools. These effects are most pronounced when new financial assets are close substitutes for existing financial assets.

Keywords: Bank Regulation; Financial Innovation; Monetary Policy Implementation; Monetary policy (search for similar items in EconPapers)
JEL-codes: E40 E42 E43 E44 E50 E52 (search for similar items in EconPapers)
Pages: 104 p.
Date: 2024-01-16
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-01

DOI: 10.17016/FEDS.2024.001

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