The Monetary Entanglement between CBDC and Central Bank Policies
33 Pages Posted: 17 Mar 2021 Last revised: 1 Sep 2023
Date Written: August 31, 2023
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: Suggested Citation