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The macroeconomics of central bank issued digital currencies

Author

Listed:
  • Barrdear, John

    () (Bank of England)

  • Kumhof, Michael

    () (Bank of England)

Abstract

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Suggested Citation

  • Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
  • Handle: RePEc:boe:boeewp:0605
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Universal Central Bank Digital Currency?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-04-23 11:54:13

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    Cited by:

    1. repec:eee:reecon:v:72:y:2018:i:2:p:171-180 is not listed on IDEAS
    2. Noelia Camara & Enestor Dos Santos & Francisco Grippa & Javier Sebastian & Fernando Soto & Cristina Varela, 2018. "Monedas digitales emitidas por bancos centrales: una valoracion de su adopcion en LatAm," Working Papers 18/05, BBVA Bank, Economic Research Department.
    3. Dirk Niepelt, 2018. "Reserves for All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence," Working Papers 18.02, Swiss National Bank, Study Center Gerzensee.
    4. Michael D. Bordo & Andrew T. Levin, 2017. "Central Bank Digital Currency and the Future of Monetary Policy," NBER Working Papers 23711, National Bureau of Economic Research, Inc.
    5. Williams, Robert Crane, 2017. "Prospects for blockchain-based settlement frameworks as a resolution to the threat of de-risking to Caribbean financial systems," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 41139, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    6. repec:nbb:ecrart:y:2017:m:june:i:i:p:79-92 is not listed on IDEAS
    7. repec:mnb:finrev:v:16:y:2017:i:3:p:32-50 is not listed on IDEAS
    8. Luca Marchiori, 2018. "Monetary theory reversed: Virtual currency issuance and miners’ remuneration," BCL working papers 115, Central Bank of Luxembourg.
    9. Alexander Lipton, 2017. "Blockchains and Distributed Ledgers in Retrospective and Perspective," Papers 1703.01505, arXiv.org.
    10. Koichiro Kamada, 2017. "The Transactions Demand for Paper and Digital Currencies," IMES Discussion Paper Series 17-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    11. Andreas Hanl, 2018. "Some Insights into the Development of Cryptocurrencies," MAGKS Papers on Economics 201804, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    12. C. Pfister, 2017. "Monetary Policy and Digital Currencies: Much Ado about Nothing?," Working papers 642, Banque de France.
    13. Donato Masciandaro, 2018. "Central Banking and Macroeconomic Ideas: Economics, Politics and History," BAFFI CAREFIN Working Papers 1858, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    14. Gabriele Camera, 2016. "A Perspective on Electronic Alternatives to Traditional Currencies," Working Papers 16-32, Chapman University, Economic Science Institute.
    15. Issing, Otmar, 2018. "Stabiles Geld - eine Illusion? Alternative Währungssysteme - Hayeks Fundamentalkritik - Unabhängigkeit der Notenbanken," SAFE White Paper Series 52, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    16. Walter Engert & Ben Fung, 2017. "Central Bank Digital Currency: Motivations and Implications," Discussion Papers 17-16, Bank of Canada.
    17. Matheus R Grasselli & Alexander Lipton, 2018. "The Broad Consequences of Narrow Banking," Papers 1810.05689, arXiv.org.
    18. Donato Masciandaro, 2014. "Macroeconomic Ideas, Business Cycles and Economic Policies: One Size Doesn’t Fit All - A Primer," BAFFI CAREFIN Working Papers 14161, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    19. Matheus R. Grasselli & Alexander Lipton, 2018. "On the Normality of Negative Interest Rates," Papers 1808.07909, arXiv.org.
    20. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    21. repec:vls:rojfme:v:4:y:2017:i:1:p:261-265 is not listed on IDEAS
    22. Zura Kakushadze & Jim Kyung-Soo Liew, 2018. "CryptoRuble: From Russia with Love," Papers 1801.05760, arXiv.org.
    23. KiHoon Hong & Kyounghoon Park & Jongmin Yu, 2017. "Crowding out in a Dual Currency Regime? Digital versus Fiat Currency," Working Papers 2017-13, Economic Research Institute, Bank of Korea.

    More about this item

    Keywords

    Distributed ledgers; blockchain; banks; financial intermediation; bank lending; money creation; money demand; endogenous money; countercyclical policy;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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