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Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment

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  • Jonathan Chiu
  • Seyed Mohammadreza Davoodalhosseini
  • Janet Jiang
  • Yu Zhu

Abstract

This paper develops a micro-founded general equilibrium model of payments to study the impact of a central bank digital currency (CBDC) on intermediation of private banks. If banks have market power in the deposit market, a CBDC can enhance competition, raising the deposit rate, expanding intermediation, and increasing output. A calibration to the US economy suggests that a CBDC can raise bank lending by 1.57% and output by 0.19%. These crowding-in effects remain robust, albeit with smaller magnitudes, after taking into account endogenous bank entry. We also assess the role of a non-interest-bearing CBDC as the use of cash declines.

Suggested Citation

  • Jonathan Chiu & Seyed Mohammadreza Davoodalhosseini & Janet Jiang & Yu Zhu, 2023. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1213-1248.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/722517
    DOI: 10.1086/722517
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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