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The macroeconomics of central bank issued digital currencies

John Barrdear () and Michael Kumhof ()

No 605, Bank of England working papers from Bank of England

Abstract: We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Keywords: Distributed ledgers; blockchain; banks; financial intermediation; bank lending; money creation; money demand; endogenous money; countercyclical policy (search for similar items in EconPapers)
JEL-codes: E41 E42 E44 E51 E52 E58 G21 (search for similar items in EconPapers)
Date: 2016-07-18
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