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Central bank digital currency and monetary policy

S. Mohammad R. Davoodalhosseini

Journal of Economic Dynamics and Control, 2022, vol. 142, issue C

Abstract: Many central banks are contemplating whether to issue a central bank digital currency (CBDC). A CBDC has certain potential benefits, including the possibility that it can bear interest. However, using a CBDC is costly for agents. I study the optimal monetary policy when only cash, only a CBDC, or both cash and a CBDC are available to agents. If the cost of using a CBDC is not too high, more efficient allocations can be implemented by using a CBDC than using cash, and the first best can be achieved. Having both cash and a CBDC available may result in lower welfare than in the cases where only cash or only a CBDC is available. The welfare gains of introducing a CBDC are estimated under various scenarios for the United States and Canada. For example, if the cost of using a CBDC relative to cash is around 0.25% of the transaction value, introducing a CBDC can lead to an increase of 0.12–0.21% consumption for the United States and 0.04–0.07% for Canada.

Keywords: Central bank digital currency; Cash; Monetary policy (search for similar items in EconPapers)
JEL-codes: E42 E50 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188921000853

DOI: 10.1016/j.jedc.2021.104150

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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