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Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment

Jonathan Chiu (), S. Mohammad R. Davoodalhosseini (), Janet Hua Jiang () and Yu Zhu

Staff Working Papers from Bank of Canada

Abstract: Many central banks are considering whether to issue a central bank digital currency (CBDC). The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest to keep their customers. As a result, banks would attract more deposits and offer more loans. Hence, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation.

Keywords: Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2019-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-pay
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