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Money and Banking with Reserves and CBDC

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  • Niepelt, Dirk

Abstract

We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision and optimal monetary policy follows modified Friedman (1969) rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.

Suggested Citation

  • Niepelt, Dirk, 2023. "Money and Banking with Reserves and CBDC," CEPR Discussion Papers 18444, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:18444
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    2. Zhang, Xuanyu & Fan, Xiaoyun, 2025. "On the demand for various CBDC designs: A quantitative decomposition of currency spill-over based on the complementary role," International Review of Economics & Finance, Elsevier, vol. 103(C).
    3. Volker Brühl, 2025. "How will the digital euro work? A preliminary analysis of design, structures, and challenges," Electronic Markets, Springer;IIM University of St. Gallen, vol. 35(1), pages 1-12, December.
    4. Beretta Edoardo & Neuberger Doris, 2025. "Trump’s Crypto Plans – A Boost for the Digital Euro?," Intereconomics: Review of European Economic Policy, Sciendo, vol. 60(3), pages 176-181.
    5. Kam, Timothy & Lee, Hyungsuk & Lee, Junsang & Ng, Sam, 2025. "On a pecuniary externality of competitive banking through goods pricing dispersion," European Economic Review, Elsevier, vol. 179(C).
    6. Xuesong Huang & Todd Keister, 2026. "Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited," Staff Reports 1179, Federal Reserve Bank of New York.
    7. Georgarakos, Dimitris & Kenny, Geoff & Laeven, Luc & Meyer, Justus, 2025. "Consumer attitudes towards a central bank digital currency," Working Paper Series 3035, European Central Bank.
    8. Hess, Simon, 2025. "What Difference Does Central Bank Digital Currency Make? Insights from an Agent-based Model," Thuenen-Series of Applied Economic Theory 171, University of Rostock, Institute of Economics.
    9. Berg, Tobias & Keil, Jan & Martini, Felix & Puri, Manju, 2024. "CBDCs, Payment Firms, and Geopolitics," CEPR Discussion Papers 19367, Centre for Economic Policy Research.
    10. Grobys, Klaus & Junttila, Juha-Pekka & Kolari, James W., 2025. "A stablecoin that’s actually stable: A portfolio optimization approach," Journal of Financial Stability, Elsevier, vol. 81(C).
    11. Philippe Bacchetta & Elena Perazzi, 2021. "CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective," Swiss Finance Institute Research Paper Series 21-81, Swiss Finance Institute.
    12. Wu, Jiaqi & Liu, Xin & Zhang, Chenghu, 2024. "Unveiling the influencing mechanism underlying users’ adoption and recommend intentions of central bank digital currency: A behavioral reasoning theory perspective," Journal of Retailing and Consumer Services, Elsevier, vol. 81(C).
    13. Cong, Lin William & Mayer, Simon, 2025. "Strategic digitization in currency and payment competition," Journal of Financial Economics, Elsevier, vol. 168(C).
    14. Nyffenegger, Remo, 2024. "Central bank digital currency and bank intermediation: Medium of Exchange vs. Savings vehicle," European Economic Review, Elsevier, vol. 170(C).
    15. Ferrari Minesso, Massimo & Siena, Daniele, 2026. "Private money and public debt. U.S. Stablecoins and the global safe asset channel," Working Paper Series 3174, European Central Bank.
    16. Son, Jaemin & Ryu, Doojin & Webb, Robert I., 2023. "Central bank digital currency: Payment choices and commercial bank profitability," International Review of Financial Analysis, Elsevier, vol. 90(C).
    17. Jitender Kumar & Manju Rani, 2025. "Past, present and future of central bank digital currency: a systematic literature review and relevant issues," Journal of Banking Regulation, Palgrave Macmillan, vol. 26(4), pages 701-720, December.
    18. Dirk Niepelt, 2024. "Money and Banking with Reserves and CBDC," Journal of Finance, American Finance Association, vol. 79(4), pages 2505-2552, August.
    19. Peng, Wei & Xin, Baogui & Tan, Hui & Kwon, Jiwon, 2025. "The co-effects of technology innovation and digital infrastructure on central bank digital currency: A DSGE analysis," Research in International Business and Finance, Elsevier, vol. 75(C).
    20. Abad, Jorge & Nuño, Galo & Thomas, Carlos, 2025. "CBDC and the operational framework of monetary policy," Journal of Monetary Economics, Elsevier, vol. 151(C).

    More about this item

    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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