The Monetary Entanglement between CBDC and Central Bank Policies

33 Pages Posted: 17 Mar 2021 Last revised: 1 Sep 2023

See all articles by Martina Fraschini

Martina Fraschini

University of Luxembourg

Luciano Somoza

ESSEC Business School

Tammaro Terracciano

IESE Business School

Date Written: August 31, 2023

Abstract

Using a two-period equilibrium model, we show that the effects of introducing a Central Bank Digital Currency (CBDC) depend on the ongoing monetary policy. We derive neutrality conditions without direct pass-through policies and find that they do not always hold with quantitative easing, as bank lending shrinks if demand for CBDC is above a certain threshold. Moreover, we find that commercial banks optimally liquidate excess reserves in the system to accommodate households’ demand for CBDC. This leads to the replacement of banks with households on the liability side of the central bank balance sheet, making quantitative tightening difficult to implement.

Keywords: CBDC, central banking, monetary policy, quantitative easing, neutrality

JEL Classification: E4, E5, G2

Suggested Citation

Fraschini, Martina and Somoza, Luciano and Terracciano, Tammaro, The Monetary Entanglement between CBDC and Central Bank Policies (August 31, 2023). Available at SSRN: https://ssrn.com/abstract=3804966 or http://dx.doi.org/10.2139/ssrn.3804966

Martina Fraschini (Contact Author)

University of Luxembourg ( email )

Luciano Somoza

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Tammaro Terracciano

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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