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The optimal quantity of CBDC in a bank-based economy

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

Abstract

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-offss 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. JEL Classification: E42, E58, G21

Suggested Citation

  • Burlon, Lorenzo & Montes-Galdón, Carlos & Muñoz, Manuel A. & Smets, Frank, 2022. "The optimal quantity of CBDC in a bank-based economy," Working Paper Series 2689, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222689
    Note: 58657
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    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. 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.
    5. Meller, Barbara & Soons, Oscar, 2023. "Know your (holding) limits: CBDC, financial stability and central bank reliance," Occasional Paper Series 326, European Central Bank.
    6. 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.
    7. Muñoz, Manuel A., 2020. "Macroprudential policy and the role of institutional investors in housing markets," Working Paper Series 2454, European Central Bank.
    8. Nocciola, Luca & Zamora-Pérez, Alejandro, 2024. "Transactional demand for central bank digital currency," Working Paper Series 2926, European Central Bank.
    9. 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.
    10. 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

    bank intermediation; central bank digital currency; 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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