The optimal quantity of CBDC in a bank-based economy

By Lorenzo Burlon, Carlos Montes-Galdón, Manuel Muñoz and Frank Smets

We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offs and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such “stabilization effect” improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains.

Central Bank Digital Currencies (CBDC) are often presented as a response of central banks to cryptocurrencies. That is wrong. First CBDC do not need to be on a blockchain, as the central bank manages its ownership. Second, its value can be managed by monetary policy. This means that it has many commonalities with non-digital money, but, as this paper shows, CBDC also has a few properties that make it a valuable addition to the portfolio of assets the public can use.


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