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

Jonathan Chiu and S. Mohammad R. Davoodalhosseini

Staff Working Papers from Bank of Canada

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 payment and incorporates a novel general equilibrium feedback effect from transactions to deposit 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 capture up to 23.3% of the payment market.

Keywords: Digital currencies and fintech; Monetary policy; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E50 E58 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-63

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