Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment

Abstract

This paper develops a micro-founded general equilibrium model of payments to study the impact of a central bank digital currency (CBDC) on intermediation of private banks. If banks have market power in the deposit market, a CBDC can enhance competition, raising the deposit rate, expanding intermediation, and increasing output. A calibration to the U.S. economy suggests that a CBDC can raise bank lending by 1.53% and output by 0.11%. We evaluate various design features of the CBDC, including its interest, acceptability, eligibility as reserves and the supply rule. We also assess the role of a CBDC as the use of cash declines.

Keywords: Central Bank Digital Currency, Bank Market Power, Monetary Policy, Disintermediation

JEL Classification: E50, E58