A Model for Central Bank Digital Currencies: Do CBDCs Disrupt the Financial Sector?

Abstract

Since technological innovations provoked a rethinking of the monetary system, central banks analyze the potentials and risks of CBDCs. While CBDCs offer several benefits, many suggest that they impose a threat to financial stability as they might disintermediate commercial banks and facilitate bank runs. To analyze these concerns, we develop an appropriate New Keynesian DSGE framework. Our focus lies on the effects of interest- and non-interest-bearing CBDCs in times of financial crises and their interaction with the zero lower bound (ZLB). Additionally, we study the role of central bank funding and a rule-based interest rate on CBDCs. We find that CBDCs indeed crowd out bank deposits and affect bank funding. However, this crowding-out effect is not necessarily a threat to financial stability and a cause for economic disturbances when the central bank chooses an adequate policy.

Keywords: CBDC, Financial stability, monetary policy, disintermediation

JEL Classification: D53, E42, E58, G21