Federal Reserve Bank of St. Louis
Assessing the Impact of Central Bank Digital Currency on Private Banks
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.
Cite this item
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.
Note: New working paper number 2018-026
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
Keywords: Digital Currency; Central Banks; Monopoly; Markups
This item with handle RePEc:fip:fedlwp:2018-025
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