Working Paper: CEPR ID: DP15457
Authors: Dirk Niepelt
Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
Keywords: reserves; deposits; central bank digital currency; monetary policy; Friedman rule; equivalence; Ramsey policy; bank profits; money creation
JEL Codes: E42; E43; E51; E52; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of CBDC (E42) | equilibrium allocations (D51) |
| introduction of CBDC (E42) | price systems (P22) |
| deposit-based payment system (E42) | higher taxes (H29) |
| optimal policy rules (E61) | account for implicit subsidies (H23) |
| liquidity benefits = social costs of managing liquidity (J32) | optimal policy rules (E61) |