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

62 Pages Posted: 12 Feb 2019 Last revised: 26 Jun 2020

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 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

Suggested Citation

Chiu, Jonathan and Davoodalhosseini, Seyed Mohammadreza and Hua Jiang, Janet and Zhu, Yu, Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment (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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