Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design

Jonathan Chiu () and Seyed Mohammadreza Davoodalhosseini ()
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Jonathan Chiu: Banking and Payments Department, Bank of Canada, Ottawa, Ontario K1A 0G9, Canada
Seyed Mohammadreza Davoodalhosseini: Banking and Payments Department, Bank of Canada, Ottawa, Ontario K1A 0G9, Canada

Management Science, 2023, vol. 69, issue 11, 6708-6730

Abstract: Many central banks are considering issuing a central bank digital currency (CBDC). How will the CBDC affect the macroeconomy? Will its design matter? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking, and welfare. Our model captures the competition between different means of payments and incorporates a novel general equilibrium feedback effect from transactions to deposits creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects, and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 10.2% and welfare by 0.059%, and it can capture up to 23.3% of the payment market. We also discuss some lessons for designing a CBDC.

Keywords: central bank digital currency; banking; general equilibrium; payments (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6708-6730

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