Working Paper: CEPR ID: DP16995
Authors: Lorenzo Burlon; Carlos Montes-Galdón; Manuel A. Muñoz; Frank Smets
Abstract: Recent studies suggest that the risk of bank disintermediation through deposit substitution could undermine the potential benefits of issuing a central bank digital currency (CBDC); a technologically superior means of payment issued by a central bank. First, we provide evidence on the estimated impact of digital euro news on euro area bank stock prices. The expected impact of CBDC on bank valuations and lending supply crucially depends on the design features aimed at calibrating the amount of CBDC in circulation. Then, we develop a quantitative DSGE model that incorporates these trade-offs and a selection of mechanisms through which the issuance of a CBDC could affect bank intermediation and the real economy. The sign and magnitude of the impact depend on the design of a CBDC as well as on the response of the central bank balance sheet and its collateral framework. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The model suggests that the welfare-maximizing amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly real GDP in equilibrium.
Keywords: central bank digital currency; bank intermediation; DSGE models
JEL Codes: E42; E58; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CBDC issuance (E42) | bank disintermediation (G21) |
| CBDC issuance (E42) | bank valuations (G21) |
| CBDC issuance (E42) | lending supply (E51) |
| amount of CBDC in circulation (E42) | bank valuations (G21) |
| amount of CBDC in circulation (E42) | lending supply (E51) |
| CBDC issuance (E42) | economic stimulation (O51) |
| CBDC issuance (E42) | bank lending (G21) |
| design of CBDC (E58) | impact on bank valuations and lending (G21) |
| central bank's collateral framework (E58) | impact on bank valuations and lending (G21) |