Central Bank Digital Currency and Monetary Policy

61 Pages Posted: 2 Aug 2017 Last revised: 3 Aug 2018

Date Written: July 26, 2018

Abstract

Many central banks are contemplating whether to issue a central bank digital currency (CDBC). CDBC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.

Keywords: Central Bank Digital Currency, Cash, Electronic Money, Monetary Policy

Suggested Citation

Davoodalhosseini, Seyed Mohammadreza, Central Bank Digital Currency and Monetary Policy (July 26, 2018). Available at SSRN: https://ssrn.com/abstract=3011401 or http://dx.doi.org/10.2139/ssrn.3011401

Seyed Mohammadreza Davoodalhosseini (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

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