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Welfare and Political Economy Aspects of a Central Bank Digital Currency

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  • Cukierman, Alex

Abstract

The point of departure of this paper is that, in order to preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks will eventually have to issue their own digital currencies. Although a non-negligible number of central banks (CBs) are actively considering the pros and cons of a central bank digital currency (CBDC) there is yet no CB that has issued such a currency on a full scale. Following a brief survey of current CBs positions on the issuance of a CBDC the paper presents two proposals for the implementation of such a currency: A moderate proposal in which only the banking sector continues to have access to deposits at the CB and a radical one in which the entire private sector is allowed to hold digital currency deposits at the CB. The paper compares and contrasts the implications of those two polar paths to a CBDC for the funding of banks, the allocation of credit to the economy and their implications for welfare as well as for political feasibility. One section of the paper shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run. The paper evaluates the relative merits of issuing a currency on a blockchain using a permissionless distributed ledger technology in comparison to a centralized (permissioned) blockchain ledger operated by the CB and concludes that the latter dominates the former in more than one dimension. But it does acknowledge that distributed ledger technologies have many actual and potential cost savings benefits in other segments of the financial and real sectors.

Suggested Citation

  • Cukierman, Alex, 2019. "Welfare and Political Economy Aspects of a Central Bank Digital Currency," CEPR Discussion Papers 13728, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13728
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    References listed on IDEAS

    as
    1. Benigno, Pierpaolo, 2019. "Monetary Policy in a World of Cryptocurrencies," CEPR Discussion Papers 13517, C.E.P.R. Discussion Papers.
    2. repec:eee:moneco:v:95:y:2018:i:c:p:86-96 is not listed on IDEAS
    3. 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.
    4. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    5. Tommaso Mancini Griffoli & Maria Soledad Martinez Peria & Itai Agur & Anil Ari & John Kiff & Adina Popescu & Celine Rochon, 2018. "Casting Light on Central Bank Digital Currencies," IMF Staff Discussion Notes 18/08, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    blockchain technology; Central bank digital currency; centralized versus decentralized currencies; narrow banking; permissioned; permissionless;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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