Working Paper: CEPR ID: DP15322
Authors: Florian Bser; Hans Gersbach
Abstract: We examine how the introduction of an interest-bearing central bank digital currency(CBDC) impacts bank activities and monetary policy. Depositors can switch from bankdeposits to CBDC as a safe medium of exchange at any time. As banks face digital runs,either because depositors have a preference for CBDC or fear bank insolvency, monetarypolicy can use collateral requirements (and default penalties) to initially increase bankers'monitoring incentives. This leads to higher aggregate productivity. However, the mass ofhouseholds holding CBDC will increase over time, causing additional liquidity risk for banks.After a certain period, monetary policy with tight collateral requirements generating liquidityrisk for banks and exposing bankers to default penalties would render banking non-viableand prompt the central bank to abandon such policies. Under these circumstances, bankers'monitoring incentives will revert to low levels. Accordingly, a CBDC can at best yield short-termwelfare gains.
Keywords: central bank digital currency; monetary policy; banks; deposits
JEL Codes: E42; E52; E58; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CBDC introduction (E42) | bank activities (G21) |
| CBDC introduction (E42) | monetary policy (E52) |
| bank activities (G21) | monitoring incentives (M52) |
| monitoring incentives (M52) | aggregate productivity (E23) |
| monetary policy adjustments (E52) | banking outcomes (G21) |
| CBDC introduction (E42) | liquidity risks (G33) |
| tight collateral requirements (G21) | monitoring incentives (M52) |
| tight collateral requirements (G21) | banking viability (G21) |
| CBDC introduction (E42) | long-term welfare gains (D69) |