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Assessing the Impact of Central Bank Digital Currency on Private Banks

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  • David Andolfatto

Abstract

I investigate how a central bank digital currency (CBDC) can be expected to impact a monopolistic banking sector. My framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. I find that the introduction of a CBDC has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly-designed CBDC is not likely to threaten financial stability.

Suggested Citation

  • David Andolfatto, 2018. "Assessing the Impact of Central Bank Digital Currency on Private Banks," Working Papers 2018-026, Federal Reserve Bank of St. Louis, revised 22 Apr 2020.
    • Handle: RePEc:fip:fedlwp:2018-025
    DOI: 10.20955/wp.2018.026
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    References listed on IDEAS

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    More about this item

    Keywords

    Digital Currency; Central Banks; Monopoly; Markups;
    All these keywords.

    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

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