Should Central Banks Issue Digital Currency?

Todd Keister and Daniel Sanches

No 21-37, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We study how the introduction of central bank digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. We highlight an important policy tradeoff: While a digital currency tends to promote efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.

Keywords: Monetary policy; public vs. private money; electronic payments; liquidity premium; disintermediation (search for similar items in EconPapers)
JEL-codes: E42 E58 G28 (search for similar items in EconPapers)
Pages: 51
Date: 2021-11-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (54)

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Related works:
Journal Article: Should Central Banks Issue Digital Currency? (2023)
Working Paper: Should Central Banks Issue Digital Currency? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:93351

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DOI: 10.21799/frbp.wp.2021.37

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