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Central Bank Digital Currency: Demand Shocks and Optimal Monetary Policy

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  • Hanfeng Chen
  • Maria Elena Filippin

Abstract

We study the implications of a central bank digital currency (CBDC) for the transmission of household preference shocks and for welfare in a New Keynesian framework where the CBDC competes with bank deposits for household resources and banks have market power. We show that an increase in the benefit of CBDC has a mildly expansionary effect, weakening bank market power and significantly reducing the deposit spread. As households economize on liquid asset holdings, they reduce both CBDC and deposit balances. However, the degree of bank disintermediation is low, as deposit outflows remain modest. We then examine the welfare implications of CBDC rate setting and find that, compared to a non-interest-bearing CBDC, the gains with standard coefficients for a CBDC interest rate Taylor rule are modest, but they become considerable when the coefficients are optimized. Welfare gains are higher when the CBDC provides a higher benefit.

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  • Hanfeng Chen & Maria Elena Filippin, 2025. "Central Bank Digital Currency: Demand Shocks and Optimal Monetary Policy," Papers 2507.15048, arXiv.org.
    • Handle: RePEc:arx:papers:2507.15048
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    References listed on IDEAS

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    5. James Tobin, 1987. "The case for preserving regulatory distinctions," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 167-205.
    6. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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