Should Central Banks Issue Digital Currency?

32 Pages Posted: 6 Jun 2019 Last revised: 29 Apr 2020

See all articles by Todd Keister

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: 2019-06-03

Abstract

We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banksfunding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.

Keywords: Monetary policy, liquidity premium, collateral constraint, aggregate investment, cryptocurrency

JEL Classification: E32, E42, E52, G28

Suggested Citation

Keister, Todd and Sanches, Daniel R., Should Central Banks Issue Digital Currency? (2019-06-03). FRB of Philadelphia Working Paper No. 19-26, Available at SSRN: https://ssrn.com/abstract=3399069 or http://dx.doi.org/10.21799/frbp.wp.2019.26

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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