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Should Central Banks Issue Digital Currency?

Author

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  • Todd Keister
  • Daniel Sanches

Abstract

We study how introducing a central bank digital currency affects equilibrium allocations and welfare in an environment where both currency and bank deposits are used in exchange. We highlight an important policy tradeoff: while a digital currency tends to improve efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.

Suggested Citation

  • Todd Keister & Daniel Sanches, 2023. "Should Central Banks Issue Digital Currency?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(1), pages 404-431.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:1:p:404-431.
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    File URL: http://hdl.handle.net/10.1093/restud/rdac017
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    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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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