The Monetary Entanglement between CBDC and Central Bank Policies

45 Pages Posted: 17 Mar 2021 Last revised: 10 May 2024

See all articles by Martina Fraschini

Martina Fraschini

University of Luxembourg

Luciano Somoza

ESSEC Business School

Tammaro Terracciano

IESE Business School

Date Written: May 5, 2024

Abstract

Using a banking model, we show that the effects of introducing a Central Bank Digital Currency (CBDC) depend on the ongoing monetary policy and the amount of excess reserves. We derive the conditions for a neutral introduction without central bank pass-through funding and find that they do not always hold with quantitative easing, as bank lending shrinks if demand for CBDC is large enough. Moreover, commercial banks optimally liquidate their excess reserves to accommodate households’ demand for CBDC. Consequently, households replace banks on the liability side of the central bank balance sheet, making quantitative tightening difficult to implement.

Keywords: financial innovation, CBDC, banking, monetary policy, neutrality

JEL Classification: G2, E4, E5

Suggested Citation

Fraschini, Martina and Somoza, Luciano and Terracciano, Tammaro, The Monetary Entanglement between CBDC and Central Bank Policies (May 5, 2024). 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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