The optimal quantity of CBDC in a bank-based economy

Lorenzo Burlon, Carlos Montes-Galdón (), Manuel A. Muñoz and Frank Smets

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We provide evidence on the estimated effects of news about the introduction of a digital euro on bank valuations and lending and find that the effects depend on the reliance on deposit funding and design features aimed at calibrating the quantity of the central bank digital currency (CBDC). Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e. imperfect substitutability across CBDC, cash and deposits and a number of financial constraints such as a collateral requirement for central bank funding), the issuance of CBDC yields non-trivial welfare trade-offs between, on one side, the positive expansion of liquidity services and the improved stabilization of deposit funding and lending and, on the other side, a negative bank disintermediation effect. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The optimal amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly GDP in equilibrium.

JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-dge, nep-eec, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Optimal Quantity of CBDC in a Bank-Based Economy (2024)
Working Paper: The optimal quantity of CBDC in a bank-based economy (2022)
Working Paper: The optimal quantity of CBDC in a bank-based economy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:23/1063

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