Working Paper: NBER ID: w31198
Authors: Bineet Mishra; Eswar S. Prasad
Abstract: We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can influence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.
Keywords: Central Bank Digital Currency; CBDC; Cash; Monetary Policy; Financial Inclusion
JEL Codes: E4; E5; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transaction efficiency (G14) | welfare gains (D69) |
| rate of return on CBDC (E43) | share of CBDC in total assets (E50) |
| government policies (H59) | consumer preferences for CBDC over cash (E41) |
| CBDC (E42) | negative nominal interest rates (E43) |
| negative nominal interest rates (E43) | CBDC demand (E41) |
| CBDC (E42) | capital flight prevention (F32) |