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Monetary Policy Transmission Through Shadow and Traditional Banks

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  • Yuteng Cheng
  • Ryuichiro Izumi

Abstract

We examine the optimal amount of user anonymity in a central bank digital currency (CBDC) in the context of bank lending. Anonymity, defined as the lender’s inability to discern an entrepreneur’s actions that enable fund diversion, influences the choice of payment instrument due to its impact on a bank’s lending decisions. We show that moderate anonymity in CBDC leads to an inefficient pooling equilibrium. To avoid this, CBDC anonymity should be either low, reducing attractiveness, or high, discouraging bank lending. Specifically, the anonymity should be high when CBDC significantly benefits sales, and low otherwise. However, competition between deposits and CBDC may hinder the implementation of low anonymity.

Suggested Citation

  • Yuteng Cheng & Ryuichiro Izumi, 2024. "Monetary Policy Transmission Through Shadow and Traditional Banks," Staff Working Papers 24-9, Bank of Canada.
    • Handle: RePEc:bca:bocawp:24-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Digital currencies and fintech;

    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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