The views expressed in this paper are solely those of the author and no responsibility for them should be attributed to the Bank of Canada.

One frequently raised concern about a central bank digital currency (CBDC) is that it is likely to compete with bank deposits as a means of payment and therefore increase private banks' funding costs and induce disintermediation. We develop a micro-founded general equilibrium model with money and banking to evaluate this concern both theoretically and quantitatively. We find that when banks have market powers in the deposit market, introducing a CBDC that competes with bank deposits as a means of payment can compel banks to raise the deposit rate and expand bank intermediation and output. The model calibrated to the U.S. economy suggests that a CBDC with a proper interest rate can raise bank lending by 3.55% and output by 0.50%. We also use the framework to evaluate other dimensions of the CBDC design, including acceptability, eligibility as reserves and the rule of supply, and assess the role of a CBDC as the economy becomes increasingly cashless.

Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment. When equilibrium does not achieve the first best (the allocation that maximizes welfare under complete information), then welfare in the CE is strictly higher than welfare in the equilibrium allocation. That is, equilibrium is not constrained efficient. Under some conditions, welfare in the CE even attains welfare in the first best. Finally, sufficient conditions are provided under which equilibrium is not constrained Pareto efficient, either. Cross-subsidization is the key to all these results. In an asset market application, the first best is shown to be implementable through tax schedules that are monotone in the asset prices.

No abstract

Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment. When equilibrium does not achieve the first best (the allocation that maximizes welfare under complete information), then welfare in the CE is strictly higher than welfare in the equilibrium allocation. That is, equilibrium is not constrained efficient. Under some conditions, welfare in the CE even attains welfare in the first best. Finally, sufficient conditions are provided under which equilibrium is not constrained Pareto efficient, either. Cross-subsidization is the key to all these results. In an asset market application, the first best is shown to be implementable through tax schedules that are monotone in the asset prices.