Central Bank Digital Currencies: A Framework for Assessing Why and How

Fung, Ben; Hałaburda, Hanna

doi:10.2139/ssrn.2994052

Cited by 111 publications

(72 citation statements)

References 10 publications

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“…However, it is fairly straightforward to show that the equilibrium allocation associated with any choice of i e > 0 can also be achieved without a digital currency by changing the target in ‡ation rate : In this sense, introducing a cash-like digital currency does not bring any meaningful bene…ts in our model. 15…”

Section: Propositionmentioning

confidence: 99%

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Should Central Banks Issue Digital Currency?

Keister¹,

Sanches²

2019

Working Paper (Federal Reserve Bank of Philadelphia)

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We study how the introduction of a central bank-issued digital currency a¤ects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are …nancially constrained, and the liquidity premium on bank deposits a¤ects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeo¤: while a digital currency tends to promote e¢ ciency in exchange, it can also crowd out bank deposits, raise banks'funding costs, and decrease investment. Despite these e¤ects, introducing a central bank digital currency often raises welfare.

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Section: Propositionmentioning

confidence: 99%

“…The market-clearing conditions for physical currency and deposits are again given by equations (14) and (15).…”

Section: A Universal Digital Currencymentioning

confidence: 99%

Should Central Banks Issue Digital Currency?

Keister¹,

Sanches²

2019

Working Paper (Federal Reserve Bank of Philadelphia)

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“…Finally, the issuance of a RCBDC would support demand by making it possible to carry out transactions, which do not currently take place due to security and privacy concerns, non-monetary costs (time allocation, "shoe-leather costs", etc. ), or incurred costs, on-line or at the point of sale (Fung and Halaburda, 2016). Conversely, some potential users of a RCBDC could be unwilling to let the central bank, in charge of guaranteeing privacy but perceived as an administration, have access to their transactions data (Pfister, 2017) and might thus avoid holding a CBDC.…”

Section: Economy and Financial Systemmentioning

confidence: 99%

Central Bank Digital Currency: One, Two or None?

Pfister

2019

SSRN Journal

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This paper considers the motives, modalities, and possible consequences of central bank digital currency (CBDC) issuance. It starts by drawing a distinction between a wholesale CBDC (WCBDC), accessible only to financial intermediaries, and a retail CBDC (RCBDC), accessible to the general public. The issuance of one could be dissociated from the other, implying the possibility of one, two, or no CBDC(s). The main motive for issuing a WCBDC could be to promote financial innovation and to lower transactions costs using a blockchain. The motives for issuing a RCBDC could be to supply the public with a digitalised monetary instrument without any liquidity or credit risks, easy to access and cheap to use. A CBDC would be created or destroyed only by the central bank and would be issued and exchanged at par with other forms of central bank money (banknotes and reserves). A WCBDC would have to be issued on a permissioned rather than a public blockchain. It would also have to be remunerated to keep reserves and the WCBDC at par. A RCBDC would not necessarily use the blockchain and would most likely involve intermediaries. The issuance of a CBDC would represent a supply shock, which would support economic growth in the medium to long run and could transitorily weigh on prices. One consequence of issuing a WCBDC could be the development of an intraday market, which could in turn lead to the adoption of a real-time monetary policy. Furthermore, the issuance of a RCBDC could put a floor to bank deposit rates and, if it is remunerated, raise them. If the RCBDC were not remunerated, the effective lower bound would be raised to zero and the effectiveness of asset purchases by the central bank could be diminished. If it were, the interest and exchange rate channels should be strengthened. The remuneration of the RCBDC would thus seem to create a trade-off between the effectiveness of monetary policy and the cost of bank intermediation.

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“…Another issue that needs to be considered is whether or not digital currency balances at the central bank should be remunerated (i.e., paid interest), which represent a significant deviation from the current practice where fiat money does not earn interest and most central banks do not remunerate banks' settlement balances held with them. (Note 14) Decisions on these issues would have major implications for monetary policy implementation, interest rate transmission, and the financial markets (Fung and Halaburda (2016)).…”

Section: Are Crypto Currencies Different?mentioning

confidence: 99%

Competing With Bitcoin - Some Policy Considerations for Issuing Digitalized Legal Tenders

Kovanen¹

2019

IJFR

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The proliferation of peer-to-peer virtual alternatives to traditional banknotes has raised concerns among policymakers about the future of traditional means of making payments and how it might affect monetary policy implementation and its effectiveness. This study provides a brief overview of the existing research in this area. It compares positions taken in the literature by authors on some of the key policy issues relevant for central banks when thinking about the issuance of digitalized legal tenders. We examine the implications of government issued digital alternatives to traditional currencies for monetary policy effectiveness, payments and settlements, and financial market stability. We also discuss recent advances in financial technology to improve the making of payments and settlements, which might help contribute to financial inclusion. At the same time, new technologies represent challenges for regulatory authorities, for instance related to efforts to contain anti-money laundering and prevent financing of terrorism. A number of authors argue that government issued digital currency is necessary to address the flaws in private crypto currencies, and to improve monetary policy effectiveness. Central banks have begun to analyze possible features of digitalized legal tenders, to better understand the policy considerations involved and effects these could have for interest rate transmission and financial markets, but there is no clear consensus on key modalities associated with digitalized legal tenders. Moreover, many central banks do not regard privately issued virtual currencies as a serious threat to traditional currencies. Given the ongoing debate, it is difficult to make firm predictions about the impact of central bank issued digital currencies on monetary policy transmission and financial markets at this point.

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Central Bank Digital Currencies: A Framework for Assessing Why and How

Cited by 111 publications

References 10 publications

Should Central Banks Issue Digital Currency?

Should Central Banks Issue Digital Currency?

Central Bank Digital Currency: One, Two or None?

Competing With Bitcoin - Some Policy Considerations for Issuing Digitalized Legal Tenders

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