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Central Bank Digital Currency and Monetary Policy

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  • Mohammad Davoodalhosseini

Abstract

Many central banks are contemplating whether to issue a central bank digital currency(CBDC). CBDC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.

Suggested Citation

  • Mohammad Davoodalhosseini, 2018. "Central Bank Digital Currency and Monetary Policy," Staff Working Papers 18-36, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-36
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    More about this item

    Keywords

    Digital currencies; Monetary policy;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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