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Idle liquidity, CBDC and banking

Author

Listed:
  • Dong, Mei
  • Xiao, Sylvia Xiaolin

Abstract

We build models with an interest-bearing central bank digital currency (CBDC) to investigate whether the interest-bearing CBDC can lead to financial disintermediation. In the benchmark model with only CBDC, entrepreneurs can deposit their idle CBDC and banks can hold CBDC to satisfy the reserve requirement. CBDC and bank deposits become complements. A higher CBDC interest rate always promotes investment and may or may not reduce bank lending, because the higher return on CBDC encourages entrepreneurs to accumulate more CBDC and deposit more. More deposits could in turn lead to more bank lending. The interest rate on reserves and the reserve requirement ratio can be effective policy tools that affect bank lending and investment. We consider extensions where cash and interest-bearing CBDC can coexist. The coexistence may require the central bank to adjust the CBDC interest rate or the interest rate on reserves. Our results suggest that the relationship between CBDC and bank deposits are crucial for understanding the effects of CBDC on banking and the macroeconomy.

Suggested Citation

  • Dong, Mei & Xiao, Sylvia Xiaolin, 2024. "Idle liquidity, CBDC and banking," European Economic Review, Elsevier, vol. 164(C).
    • Handle: RePEc:eee:eecrev:v:164:y:2024:i:c:s0014292124000291
    DOI: 10.1016/j.euroecorev.2024.104700
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    More about this item

    Keywords

    CBDC; Banking; Idle liquidity; Interest rates; Investment;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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