Working Paper: CEPR ID: DP18444
Authors: Dirk Niepelt
Abstract: We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision and optimal monetary policy follows modified Friedman (1969) rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.
Keywords: central bank digital currency; reserves; two-tier system
JEL Codes: E42; E43; E51; E52; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CBDC (E42) | liquidity provision efficiency (E41) |
| CBDC (E42) | social costs of liquidity provision (E44) |
| optimal monetary architecture (E42) | social costs of liquidity provision (E44) |
| CBDC share in payments (E42) | deposits share in payments (G35) |
| central bank policies (E58) | liquidity premium (E41) |
| central bank policies (E58) | market dynamics (D49) |