Central bank digital currency and monetary policy

By Seyed Mohammadreza Davoodalhosseini. Journal of Economic Dynamics and Control, 2021

210 citations recorded by the source corpus.

Abstract Many central banks are contemplating whether to issue a central bank digital currency (CBDC). A CBDC has certain potential benefits, including the possibility that it can bear interest. However, using a CBDC is costly for agents. I study the optimal monetary policy when only cash, only a CBDC, or both cash and a CBDC are available to agents. If the cost of using a CBDC is not too high, more efficient allocations can be implemented by using a CBDC than using cash, and the first best can be achieved. Having both cash and a CBDC available may result in lower welfare than in the cases where only cash or only a CBDC is available. The welfare gains of introducing a CBDC are estimated under various scenarios for the United States and Canada. For example, if the cost of using a CBDC relative to cash is around 0.25% of the transaction value, introducing a CBDC can lead to an increase of 0.12–0.21% consumption for the United States and 0.04–0.07% for Canada.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/1ca2403d065e0715c560978012972b7e71c21f47

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Citations in the corpus

Should Central Banks Issue Digital Currency? (2019, background): “22 See also Niepelt (2020) and Fernández-Villaverde et al. (2021). In practice, additional operational issues such as haircuts and acceptable collateral arise when the central bank lends to the private sector in the process of creating CBDC; see Assenmacher et al.”
Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies (2020, unknown): “There is also work on policy design frameworks (Davoodalhosseini and Rivadeneyra (2020), Agur et al (2019), Allen et al (2020)), their implications for cross-country payments (Milkau (2019)), implications for the international role of currencies (Ferrari et al (2020) and”