By Jonathan Chiu, Janet Hua Jiang, Seyed Mohammadreza Davoodalhosseini and Yu Zhu
This paper builds a model with imperfect competition in the banking sector. In the model, banks issue deposits and make loans, and deposits can be used as payment instruments by households. We use the model to assess the general equilibrium effects of introducing central bank digital currency (CBDC). We identify a new channel through which CBDC can improve the efficiency of bank intermediation and increase lending and aggregate output even if its usage is low, i.e., CBDC serves as an outside option for households, thus limiting banks’ market power in the deposit market. We then calibrate the model to evaluate the quantitative implication of this channel.
This paper claims that CBDC can improve outcomes by make the deposit market more competitive remove some of the rents that banks enjoy. But it seems to be that this does not need to be a digital currency, in other words having the central bank open deposit accounts for non-financial institutions would achieve the same outcome.