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Monetary Policy Pass-Through with Central Bank Digital Currency

Janet Hua and Yu Zhu
Authors registered in the RePEc Author Service: Janet Hua Jiang

Staff Working Papers from Bank of Canada

Abstract: This paper investigates how the introduction of an interest-bearing central bank digital currency (CBDC) that serves as a perfect substitute for bank deposits as an electronic means of payment affects monetary policy pass-through. When the deposit market is not fully competitive, the CBDC tends to weaken the pass-through of the interest on reserves. The interest on CBDC impacts the deposit market more directly compared with the interest on reserves. The CBDC rate can also have stronger pass-through to the loan market; however, the effect can be dampened by the policy on the interest on reserves. Therefore, coordination between the two policy rates is needed to effectively achieve policy goals.

Keywords: Digital currencies and fintech; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon, nep-opm and nep-pay
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Handle: RePEc:bca:bocawp:21-10