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The optimal quantity of CBDC in a bank-based economy

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  • Smets, Frank
  • Burlon, Lorenzo
  • Montes-Galdón, Carlos
  • Muñoz, Manuel A.

Abstract

Recent studies suggest that the risk of bank disintermediation through deposit substitution could undermine the potential benefits of issuing a central bank digital currency (CBDC); a technologically superior means of payment issued by a central bank. First, we provide evidence on the estimated impact of digital euro news on euro area bank stock prices. The expected impact of CBDC on bank valuations and lending supply crucially depends on the design features aimed at calibrating the amount of CBDC in circulation. Then, we develop a quantitative DSGE model that incorporates these trade-offs and a selection of mechanisms through which the issuance of a CBDC could affect bank intermediation and the real economy. The sign and magnitude of the impact depend on the design of a CBDC as well as on the response of the central bank balance sheet and its collateral framework. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The model suggests that the welfare-maximizing amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly real GDP in equilibrium.

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  • Smets, Frank & Burlon, Lorenzo & Montes-Galdón, Carlos & Muñoz, Manuel A., 2022. "The optimal quantity of CBDC in a bank-based economy," CEPR Discussion Papers 16995, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16995
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The optimal quantity of CBDC in a bank-based economy
      by Christian Zimmermann in NEP-DGE blog on 2022-10-16 16:45:20

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    Cited by:

    1. Ozili, Peterson K, 2023. "Central bank digital currency and bank earnings management using loan loss provisions," MPRA Paper 116412, University Library of Munich, Germany.
    2. Copestake, Alexander & Furceri, Davide & Gonzalez-Dominguez, Pablo, 2023. "Crypto market responses to digital asset policies," Economics Letters, Elsevier, vol. 222(C).
    3. Andrej Sokol & Michael Kumhof & Marco Pinchetti & Phurichai Rungcharoenkitkul, 2023. "CBDC policies in open economies," BIS Working Papers 1086, Bank for International Settlements.
    4. Meller, Barbara & Soons, Oscar, 2023. "Know your (holding) limits: CBDC, financial stability and central bank reliance," Occasional Paper Series 326, European Central Bank.
    5. Muñoz, Manuel A. & Soons, Oscar, 2023. "Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC," Working Paper Series 2801, European Central Bank.
    6. Bitter, Lea, 2020. "Banking Crises under a Central Bank Digital Currency (CBDC)," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224600, Verein für Socialpolitik / German Economic Association.
    7. Muñoz, Manuel A., 2020. "Macroprudential policy and the role of institutional investors in housing markets," Working Paper Series 2454, European Central Bank.
    8. Assenmacher, Katrin & Bitter, Lea & Ristiniemi, Annukka, 2023. "CBDC and business cycle dynamics in a New Monetarist New Keynesian model," Working Paper Series 2811, European Central Bank.
    9. Magin, Jana & Neyer, Ulrike & Stempel, Daniel, 2023. "The Macroeconomic Effects of Different CBDC Regimes in an Economy with a Heterogeneous Household Sector," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277656, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Central bank digital currency; Bank intermediation; Dsge models;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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