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Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design

Author

Listed:
  • Jonathan Chiu

    (Banking and Payments Department, Bank of Canada, Ottawa, Ontario K1A 0G9, Canada)

  • Seyed Mohammadreza Davoodalhosseini

    (Banking and Payments Department, Bank of Canada, Ottawa, Ontario K1A 0G9, Canada)

Abstract

Many central banks are considering issuing a central bank digital currency (CBDC). How will the CBDC affect the macroeconomy? Will its design matter? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking, and welfare. Our model captures the competition between different means of payments and incorporates a novel general equilibrium feedback effect from transactions to deposits creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects, and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 10.2% and welfare by 0.059%, and it can capture up to 23.3% of the payment market. We also discuss some lessons for designing a CBDC.

Suggested Citation

  • Jonathan Chiu & Seyed Mohammadreza Davoodalhosseini, 2023. "Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design," Management Science, INFORMS, vol. 69(11), pages 6708-6730, November.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6708-6730
    DOI: 10.1287/mnsc.2021.02763
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