Central Bank Digital Currency and Quantitative Easing

40 Pages Posted: 17 Mar 2021 Last revised: 5 Jan 2022

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: July 15, 2021

Abstract

We study how the introduction of a central bank digital currency (CBDC) interacts with ongoing monetary policies. We distinguish two policies: standard policy, where the central bank holds treasuries, and quantitative easing, where the central bank holds risky securities. We introduce an interest-bearing CBDC in each scenario and study the equilibrium allocations. We reach three main conclusions. First, the equilibrium impact of a CBDC depends on the ongoing monetary policy. Second, when the central bank conducts quantitative easing, the introduction of a CBDC is neutral under two conditions: the cost of issuing a CBDC is equal to the interest on reserves, and the demand for CBDC deposits is smaller than the amount of excess reserves in the system. Third, the introduction of a CBDC might render quantitative easing a quasi-permanent policy, as commercial banks optimally use their excess reserves to accommodate retailers' demand for switching from bank to CBDC deposits.

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 Quantitative Easing (July 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

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

Swiss Finance Institute ( email )

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

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

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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