Does a CBDC Reinforce Inefficiencies?

Max Fuchs ()
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Max Fuchs: University of Kassel

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper examines whether a central bank digital currency (CBDC) reinforces inefficiencies in transactions with cash. In this case, the gap between the traded quantity and the welfare-maximizing one, which arises due to discounting or a suboptimal amount of money, increases further. To get some answers, the monetary search model of Trejos and Wright (1995) is extended by a CBDC. We show that an interest-bearing CBDC reinforces inefficiencies in transactions with cash since opportunity costs for cash holders and money supply increase. Nevertheless, a CBDC is able to increase welfare as long as the share of CBDC holders is limited.

Keywords: CBDC; inefficiencies; welfare analysis (search for similar items in EconPapers)
JEL-codes: E31 E41 E51 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202228

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