Rethinking Central Bank Money: The Endogeneity of CBDCs and post-Keynesian Theory

This paper examines how Central Bank Digital Currencies (CBDCs) interact with post-Keynesian theories of endogenous money, focusing on two main issuance scenarios: conversion from existing bank deposits and discretionary issuance by the central bank. By mobilising the debate between horizontalists, structuralists and institutionalists, our analysis shows that issuing CBDCs against deposits is fully compatible with endogenous money theory. Discretionary issuance, where money would be created without prior demand for it and with no relation to banks' financing operations, raises critical questions and challenges traditional post-Keynesian views, as it introduces an exogenous component into the money supply. However, drawing on recent theoretical advances, particularly the distinction between instrument-level and system-level endogeneity, we argue that CBDCs may transform monetary regimes without necessarily undermining the endogeneity of money at the system level. Although CBDCs do not inherently undermine the endogeneity of money, their macroeconomic impact and political acceptability depend on their design and the broader institutional context. In particular, discretionary issuance opens new possibilities for monetary policy, akin to a digital form of helicopter money, but raises important concerns regarding central bank independence, financial stability, and democratic legitimacy.