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Retail CBDC: Implications for Banking and Financial Stability

Author

Listed:
  • Sebastian Infante

    (Board of Governors of the Federal Reserve System, Washington, DC, USA)

  • Kyungmin Kim

    (Board of Governors of the Federal Reserve System, Washington, DC, USA)

  • Anna Orlik

    (Board of Governors of the Federal Reserve System, Washington, DC, USA)

  • André F. Silva

    (Board of Governors of the Federal Reserve System, Washington, DC, USA)

  • Robert Tetlow

    (Board of Governors of the Federal Reserve System, Washington, DC, USA)

Abstract

This article reviews the literature examining how the introduction of a retail central bank digital currency (CBDC) would affect a modern economy, focusing on the implications for the banking sector and for financial stability. A CBDC can improve welfare by reducing financial frictions, countering market power in deposit markets, encouraging financial inclusion, and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays an important role in determining the economic consequences of the introduction of a CBDC, raising fundamental questions about the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.

Suggested Citation

  • Sebastian Infante & Kyungmin Kim & Anna Orlik & André F. Silva & Robert Tetlow, 2024. "Retail CBDC: Implications for Banking and Financial Stability," Annual Review of Financial Economics, Annual Reviews, vol. 16(1), pages 207-232, November.
    • Handle: RePEc:anr:refeco:v:16:y:2024:p:207-232
    DOI: 10.1146/annurev-financial-082123-105958
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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