Central Bank Digital Currency in Brazil

Abstract

We calibrate to the Brazilian economy a model of means of payment choice, where households have different preferences over anonymity. Financial sector is monopolistically competitive and may break the link between borrowing and lending rates. A sufficiently attractive digital currency reduces holdings of both cash and bank deposits. Since cash use is costly, the digital currency may increase welfare. However, if banks are liquidity constrained, the digital currency may result in less loans and output, and then reduce welfare. The digital currency interest remuneration can be set and be adjusted overtime to optimally balance this trade-off.

Keywords: digital currency, central bank, financial intermediation, cash, liquidity, Brazil

JEL Classification: E41, E58, G21