Negative Interest Rates on Central Bank Digital Currency

Pengfei Jia

MPRA Paper from University Library of Munich, Germany

Abstract: Paying negative interest rates on central bank digital currency (CBDC) becomes increasingly relevant to monetary operations, since several major central banks have been actively exploring both negative interest rate policy and CBDC after the Great Recession. This paper provides a formal analysis to evaluate the macroeconomic impact of negative interest rates on CBDC through the lens of a neoclassical general equilibrium model with monetary aggregates. In the benchmark model, agents have access to two types of assets: CBDC and productive capital. The demand for digital currency is motivated by a liquidity constraint. I show that paying negative interest on CBDC induces agents to save less and consume more via a substitution effect. A drop in savings in turn causes a fall in capital investment, subsequent output, and real money balances. To clear the money market, the price level increases. I then extend the model to include government bonds which deliver a positive return. This allows me to study a non-trivial portfolio effect: when the government pays a negative interest rate on CBDC, the tax on agents' capital spending increases, inducing a decrease in capital investment and an increase in government bonds in agents' portfolio. Such a policy causes a drop in investment and output. However, there is a transitory decline in the price level due to a "flight to quality".

Keywords: CBDC; Negative interest rates; Monetary policy; Public money. (search for similar items in EconPapers)
JEL-codes: E21 E22 E31 E42 E52 E63 (search for similar items in EconPapers)
Date: 2020-10-26
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:103828

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