Managing the transition to central bank digital currency

Katrin Assenmacher, Massimo Ferrari Minesso, Arnaud Mehl and Maria Sole Pagliari

No 18867, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a two-country DSGE model with financial frictions to study the transition from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost-free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption, and output. We use non-linear solution methods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand.

Keywords: Central; bank; digital; currency (search for similar items in EconPapers)
JEL-codes: E50 E58 F30 F41 (search for similar items in EconPapers)
Date: 2024-02
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Related works:
Working Paper: Managing the transition to central bank digital currency (2024)
Working Paper: Managing the transition to central bank digital currency (2024)
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