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Central Bank Digital Currency and Gresham's law: An experimental analysis

Author

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  • Romain Baeriswyl
  • Kene Boun My
  • Camille Cornand

Abstract

In a monetary system in which risk-free and risky money coexist, Gresham's law predicts that people will prefer to hoard risk-free money as a store of value and spend risky money as a medium of exchange. Establishing a payment system on the basis of risk-free money, such as a retail CBDC, while maintaining the fractional reserve banking system in place poses numerous challenges. In a laboratory experiment, we demonstrate that when the holding of risk-free money is unrestricted, people hold and pay with it extensively. However, when the ability to hold risk-free money is limited by a ceiling or an unattractive interest rate, people tend to hoard risk-free money and use risky money for payments.

Suggested Citation

  • Romain Baeriswyl & Kene Boun My & Camille Cornand, 2026. "Central Bank Digital Currency and Gresham's law: An experimental analysis," Working Papers 2026-03, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2026-03
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_03
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    JEL classification:

    • 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

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