Central Bank Digital Currency and Banking

56 Pages Posted: 12 Feb 2019 Last revised: 24 Feb 2019

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Seyed Mohammadreza Davoodalhosseini

Bank of Canada

Janet Hua Jiang

Government of Canada - Bank of Canada

Yu Zhu

Government of Canada - Bank of Canada

Date Written: February 8, 2019

Abstract

This paper builds a model with imperfect competition in the banking sector. In the model, banks issue deposits and make loans, and deposits can be used as payment instruments by households. We use the model to assess the general equilibrium effects of introducing central bank digital currency (CBDC). We identify a new channel through which CBDC can improve the efficiency of bank intermediation and increase lending and aggregate output even if its usage is low, i.e., CBDC serves as an outside option for households, thus limiting banks' market power in the deposit market. We then calibrate the model to evaluate the quantitative implication of this channel.

Keywords: Central Bank Digital Currency, Bank Intermediation/Disintermediation, Imperfect Competition

JEL Classification: E50, E58

Suggested Citation

Chiu, Jonathan and Davoodalhosseini, Seyed Mohammadreza and Hua Jiang, Janet and Zhu, Yu, Central Bank Digital Currency and Banking (February 8, 2019). Available at SSRN: https://ssrn.com/abstract=3331135 or http://dx.doi.org/10.2139/ssrn.3331135

Jonathan Chiu

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Seyed Mohammadreza Davoodalhosseini

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Janet Hua Jiang

Government of Canada - Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Yu Zhu (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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