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

Author

Listed:
  • Jonathan Chiu
  • Mohammad Davoodalhosseini
  • Janet Hua Jiang
  • Yu Zhu

Abstract

Many central banks are considering whether to issue a central bank digital currency (CBDC). The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest to keep their customers. As a result, banks would attract more deposits and offer more loans. Hence, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation.

Suggested Citation

  • Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-20
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    References listed on IDEAS

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    More about this item

    Keywords

    Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework;
    All these keywords.

    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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