Assessing the Impact of Central Bank Digital Currency on Private Banks

David Andolfatto ()

No 2018-026, Working Papers from Federal Reserve Bank of St. Louis

Abstract: I investigate how a central bank digital currency (CBDC) can be expected to impact a monopolistic banking sector. My framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. I find that the introduction of a CBDC has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly-designed CBDC is not likely to threaten financial stability.

Keywords: Digital Currency; Central Banks; Monopoly; Markups (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2018-10-05, Revised 2020-04-22
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fle, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (26)

Forthcoming in Economic Journal

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Journal Article: Assessing the Impact of Central Bank Digital Currency on Private Banks (2021)
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DOI: 10.20955/wp.2018.026

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