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Federal Reserve Bank of St. Louis
Working Papers
Assessing the Impact of Central Bank Digital Currency on Private Banks
David Andolfatto
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.


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David Andolfatto, Assessing the Impact of Central Bank Digital Currency on Private Banks, Federal Reserve Bank of St. Louis, Working Papers 2018-25, 05 Oct 2018, revised 06 Oct 2018.
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Note: New working paper number 2018-026
JEL Classification:
Subject headings:
Keywords: Digital Currency; Central Banks; Monopoly; Markups
DOI: 10.20955/wp.2018.026
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