Cash or Cache? Distributional and business cycle implications of CBDC holding limits

Jana Anjali Magin, Ulrike Neyer and Daniel Stempel

Journal of International Financial Markets, Institutions and Money, 2025, vol. 101, issue C

Abstract: Many central banks are discussing the introduction of a Central Bank Digital Currency (CBDC). Empirical evidence suggests that households differ in their demand for a CBDC. This paper investigates the macroeconomic and distributional effects of different CBDC regimes within a New Keynesian model with a heterogeneous household sector. Households prefer to hold part of their income in CBDC as a means of payment as it facilitates transactions. If they cannot hold their preferred share of CBDC, they will face transaction costs. We find that the introduction of a binding limit on CBDC holdings can increase the shock absorption capabilities of an economy. If the limit is used as a monetary policy instrument, prices will be stabilized more effectively after shocks. However, a CBDC implies distributional effects across households.

Keywords: Central bank digital currency; Monetary policy; Household heterogeneity; Central banks; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000514

DOI: 10.1016/j.intfin.2025.102161

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