IMF published a working paper that studies the optimal design for a central bank digital currency (CBDC) in a given environment. This is an environment where agents sort into cash, CBDC, and bank deposits according to their preferences over anonymity and security and where network effects make the convenience of payment instruments dependent on the number of their users. In this paper, the authors build a theoretical framework geared at analyzing the relationship between CBDC design, the demand for money types, and financial intermediation. This paper relates the effects on cash, deposits, and bank intermediation to two key design choices involved in developing a CBDC: the degree to which the CBDC resembles cash and whether it is interest-bearing.
The paper states that CBDC can be designed with attributes similar to cash or deposits and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC helps the central bank alleviate trade-offs. In a world where network effects have no material impact, nothing is lost by limiting CBDC design to non interest-bearing CBDCs. However, when network effects pose a threat to the variety of payment instruments, an interest-bearing CBDC becomes optimal. An optimally designed interest-bearing CBDC hits the aims of safeguarding bank intermediation and protecting the trio of payment instruments against network effects, irrespective of the role of financial frictions in the economy. This finding provides an economic counterweight to the political economy considerations that may otherwise drive central banks to opt for a non-interest-bearing CBDC, such as concerns about the possibility of negative rates on publicly accessible central bank liabilities.
Related Link: Working Paper
Keywords: International, Banking, Fintech, Digital Currency, CBDC, Research, Interest Bearing CBDC, IMF
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