Central Bank Digital Currency and Balance Sheet Policy

33 Pages Posted: 17 Mar 2021 Last revised: 30 Mar 2021

See all articles by Martina Fraschini

Martina Fraschini

University of Lausanne, HEC; Swiss Finance Institute

Luciano Somoza

University of Lausanne, HEC; Swiss Finance Institute

Tammaro Terracciano

University of Geneva, GFRI; Swiss Finance Institute

Date Written: March 15, 2021

Abstract

This paper studies a stylized economy in which the central bank can hold either treasuries or risky securities against central bank digital currency (CBDC) deposits. The key mechanism driving the results is the reduction in bank deposits that follows the introduction of a CBDC and its impact on the banking sector. With CBDC funds invested in treasuries, the central bank channels funds back to the banking sector via open market operations and the introduction of a CBDC is neutral, consistently with the equivalence theorem of Brunnermeier and Niepelt (2019). However, it is not neutral when accounting for liquidity requirements, quantitative easing or for CBDC deposits held against risky securities. We reach three main conclusions. First, current monetary policy regimes do matter for CBDC equilibrium effects. Second, a CBDC might render current quantitative easing programs a quasi-permanent policy, as commercial banks might use their excess reserves to allow depositors to switch from bank to CBDC deposits. Third, there is a trade-off between bank lending to the economy and taxes, as holding risky assets against CBDC deposits leads to lower expected taxes and lower bank lending.

Keywords: CBDC, central banking, monetary policy, QE

JEL Classification: E4, E5, G2

Suggested Citation

Fraschini, Martina and Somoza, Luciano and Terracciano, Tammaro, Central Bank Digital Currency and Balance Sheet Policy (March 15, 2021). Swiss Finance Institute Research Paper No. 21-25, Available at SSRN: https://ssrn.com/abstract=3804966 or http://dx.doi.org/10.2139/ssrn.3804966

Martina Fraschini

University of Lausanne, HEC ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Luciano Somoza

University of Lausanne, HEC ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

HOME PAGE: http://www.lucianosomoza.com

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41 797322881 (Phone)

HOME PAGE: http://www.lucianosomoza.com

Tammaro Terracciano (Contact Author)

University of Geneva, GFRI ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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