CBDC as imperfect substitute to bank deposits: a macroeconomic perspective

Perazzi, Elena and Bacchetta, Philippe (2022): CBDC as imperfect substitute to bank deposits: a macroeconomic perspective.

Abstract

The impact of Central Bank Digital Currency (CBDC) is analyzed in a closed-economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.

• Item Type: MPRA Paper
• Language: English
• Keywords: CBDC; welfare; substitutability
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

Agur, Itai, Anil Ari, Giovanni Dell’Ariccia (2021), "Designing central bank digital currencies." Journal of Monetary Economics.

Ahnert, Toni Katrin Assenmacher, Peter Hoffmann, Agnese Leonello, Cyril Monnet, and Davide Porcellacchia (2022), "The economics of central bank digital currency ." ECB Working Papers No. 2578.

Andolfatto, David (2021), "Assessing the impact of central bank digital currency on private banks." The Economic Journal 131.634: 525-540.

Assenmacher, Katrin, Aleksander Berentsen, Claus Brand and Nora Lamersdorf (2021), "A unified framework for CBDC design: remuneration, collateral haircuts and quantity constraints." ECB Working Papers No. 2578.

Auer, Raphael, Jon Frost, Leonardo Gambacorta, Cyril Monnet, Tara Rice, and Hyun Song Shin (2021), "Central bank digital currencies: motives, economic implications and the research frontier." BIS Working Papers No. 976.

Barrdear, John, and Michael Kumhof (2021), "The macroeconomics of central bank issued digital currencies." Journal of Economic Dynamics and Control: 104148.

Benati, L., Lucas Jr., R.E., Nicolini, J.P., and Weber, W. (2021), "International Evidence on Long-Run Money Demand.” Journal of Monetary Economics 117, 43–63.

\bibitem{} Bordo, Michael D., and Andrew T. Levin (2017), "Central bank digital currency and the future of monetary policy." No. w23711. National Bureau of Economic Research.

Boyd, John H., and Gianni De Nicolo (2005), "The theory of bank risk taking and competition revisited." The Journal of finance 60 no.3: 1329-1343.

Brunnermeier, Markus K., Harold James, and Jean-Pierre Landau (2019), "The digitalization of money." No. w26300, National Bureau of Economic Research.

Brunnermeier, Markus K., and Dirk Niepelt (2019), "On the equivalence of private and public money." Journal of Monetary Economics 106: 27-41.

Cochrane, John H. "Toward a run-free financial system." (2014).

Burlon, L., Muñoz, M.A., Montes-Galdón, C., and F. Smets (2022), "The optimal quantity of CBDC in a bank-based economy." ECB working paper, 2689.

Chiu, Jonathan and Mohammad Davoodalhosseini(2021), "Central Bank Digital Currency and Banking:Macroeconomic Benefits of a Cash-Like Design." Staff Working Paper 2021-63, Bank of Canada.

Chiu, Jonathan, Mohammad Davoodalhosseini, Janet Hua Jiang, and Yu Zhu (2022), "Bank market power and central bank digital currency: Theory and quantitative assessment." Journal of Political Economy, forthcoming.

Davoodalhosseini, S.M. (2022) "Central bank digital currency and monetary policy." Journal of Economic Dynamics and Control 142, 104150.

Del Negro, Marco, and Christopher A. Sims (2015), "When does a central bank' s balance sheet require fiscal support?" Journal of Monetary Economics 73: 1-19.

Drechsler, Itamar, Alexi Savov, and Philipp Schnabl (2017), "The deposits channel of monetary policy." The Quarterly Journal of Economics 132, no. 4: 1819-1876.

Evers, Michiel, Ruud De Mooij, and Daniel Van Vuuren (2008), "The wage elasticity of labor supply: a synthesis of empirical estimates." De Economist 156.1: 25-43.

Feenstra, R.C. (1986), "Functional equivalence between liquidity costs and the utility of money." Journal of Monetary Economics, 17(2): 271-291.

Ferrari, Massimo Minesso, Arnaud Mehl, and Livio Stracca (2022), "Central bank digital currency in an open economy." Journal of Monetary Economics 127, 54-68.

Gerali, Andrea, Stefano Neri, Luca Messa, and Federico M. Signoretti (2010), "Credit and Banking in a DSGE Model of the Euro Area." Journal of Money, Credit and Banking 42, 107-140.

Hnatkovska, Viktoria, Amartya Lahiri, and Carlos A. Vegh (2016), "The Exchange Rate Response to Monetary Policy Innovations." American Economic Journal: Macroeconomics, 8(2): 137-181.

Infante, Sebastian, Kyungmin Kim, Anna Orlik, André F. Silva, and Robert J. Tetlow (2022), "The Macroeconomic Implications of CBDC: A Review of the Literature." Finance and Economics Discussion Series 2022-076. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2022.076.

Keister, Todd, and Daniel R. Sanches (2022), "Should central banks issue digital currency?" Review of Economic Studies, forthcoming.

Mancini-Griffoli, Tommaso, et al. (2018), "Casting light on central bank digital currency." IMF Staff Discussion Notes 18.08.

Meaning, J., Dyson, B., Barker, J., and Clayton, E. (2018), "Broadening narrow money: monetary policy with a central bank digital currency."

Mendoza, Enrique G. (1995), "The terms of trade, the real exchange rate, and economic fluctuations." International Economic Review: 101-137.

Neumeyer, Pablo and Fabrizio Perri (2005), "Business cycles in emerging economies: the role of interest rates." Journal of monetary Economics 52.2: 345-380.

Niepelt, Dirk (2022), "Money and Banking with Reserves and CBDC." mimeo.

Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon (2015), "Dissecting the effect of credit supply on trade: Evidence from matched credit-export data." The Review of Economic Studies 82: 333-359.

Piazzesi, Monika, and Martin Schneider (2022), "Credit lines, bank deposits or CBDC? competition and efficiency in modern payment systems." Unpublished, Stanford University.

Piazzesi, Monika, Ciaran Rogers, and Martin Schneider (2022), "Money and banking in a New Keynesian model." Unpublished, Stanford University.

Piketty, Thomas, and Gabriel Zucman (2014), "Capital is back: Wealth-income ratios in rich countries 1700–2010." The Quarterly Journal of Economics 129, 1255-1310.

Reis, Ricardo (2017), "Can the central bank alleviate fiscal burdens?", No. w23014. National Bureau of Economic Research.

Romer, Christina D., David H. Romer, Stephen M. Goldfeld, and Benjamin M. Friedman. "New evidence on the monetary transmission mechanism", Brookings Papers on Economic Activity 1990, no. 1 (1990): 149-213.

Schmitt-Grohe, Stephanie, and Martin Uribe (2004), "Optimal fiscal and monetary policy under sticky prices." Journal of Economic Theory 114.2: 198-230.

Trabandt, Mathias, and Harald Uhlig (2011), "The Laffer curve revisited." Journal of Monetary Economics 58.4: 305-327.

Wang, Ping, and Chong K. Yip. (1992), "Alternative approaches to money and growth." Journal of Money, Credit and Banking 24, no. 4: 553-562.

Whited, Toni M., Wu, Yufeng, and Kairong Xiao (2022), "Central Bank Digital Currency and Banks," Mimeo.

Williamson, Stephen (2022), "Central Bank Digital Currency: Welfare and Policy Implications." Journal of Political Economy 130.