Assessing the Impact of Central Bank Digital Currency on Private Banks

Andolfatto, David

doi:10.20955/wp.2018.026

Working Paper

Assessing the Impact of Central Bank Digital Currency on Private Banks

Abstract: I investigate the theoretical impact of central bank digital currency (CBDC) on a monopolistic banking sector. The framework combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of banking. There are two main results. First, the introduction of interest-bearing CBDC increases financial inclusion, diminishing the demand for physical cash. Second, while interest-bearing CBDC reduces monopoly profit, it need not disintermediate banks in any way. CBDC may, in fact, lead to an expansion of bank deposits if CBDC competition compels banks to raise their deposit rates.

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

JEL Classification: E4; E5;

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