Working Paper Revision

Assessing the Impact of Central Bank Digital Currency on Private Banks

Abstract: I investigate how a central bank digital currency (CBDC) can be expected to impact a monopolistic banking sector. My framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. I find that the introduction of a CBDC has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly-designed CBDC is not likely to threaten financial stability.

Keywords: Digital Currency; Central Banks; Monopoly; Markups;

JEL Classification: E4; E5;

https://doi.org/10.20955/wp.2018.026

Status: Forthcoming in Economic Journal

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-04-22

Number: 2018-026

Related Works

• Working Paper Revision: Assessing the Impact of Central Bank Digital Currency on Private Banks