Should Central Banks Issue Digital Currency?

Todd Keister and Daniel Sanches

No 19-26, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banks' funding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.

Keywords: Monetary policy; liquidity premium; collateral constraints; aggregate investment; cryptocurrency (search for similar items in EconPapers)
JEL-codes: E32 E42 E52 G28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-06-03
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (33)

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Related works:
Journal Article: Should Central Banks Issue Digital Currency? (2023)
Working Paper: Should Central Banks Issue Digital Currency? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:19-26

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DOI: 10.21799/frbp.wp.2019.26

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