Should Central Banks Issue Digital Currency?

Author:

Keister Todd1,Sanches Daniel2

Affiliation:

1. Rutgers University Department of Economics,

2. Federal Reserve Bank of Philadelphia

Abstract

Abstract We study how introducing a central bank digital currency affects equilibrium allocations and welfare in an environment where both currency and bank deposits are used in exchange. We highlight an important policy tradeoff: while a digital currency tends to improve efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.

Publisher

Oxford University Press (OUP)

Subject

Economics and Econometrics

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