Central Bank Digital Currency and the Agenda of Monetary Devolution

Abstract

The creation of central bank digital currencies, or CBDCs, is typically discussed from the standpoint of tradeoffs, as if the crucial question at hand were only how to improve the efficiency and security of the payment system, or, more ambitiously, how to design money to fend off global warming, redress inequalities, and tackle other political grievances. Less attention is paid to how CBDCs are also tools to conduct fiscal and monetary policy.

Once we focus on these dimensions, CBDCs spring up as a form of “monetary devolution”. The devolution lies in that the power to create money is shifted at least in part from commercial banks to the state. This is particularly clear if the CBDCs take on properties of cash and are made available to the public at large. These “retail” CBDCs create the conditions to crowd out commercial bank deposits and have them replaced with sovereign money. As such, the agenda becomes one of monetary repression (because they facilitate the political allocation of credit) and debt monetization (because they can increase the demand for the sovereign money that is spent by the Treasury).

We discuss the agenda of monetary devolution in the United States and outline an alternative that incorporates the technological edge provided by CBDCs. This alternative would be the creation of wholesale CBDCs to serve as the monetary base to settle retail payments with stablecoins. Designed as such, CBDCs could preserve the current balance between private and public money. This alternative is worth contemplating, but its political appeal is severely diminished by its incompatibility with a program of persistent monetary financing of the Treasury.

Keywords: CBDC, Central Bank Digital Currency, Fiscal Policy, Monetary Policy, financial repression, debt monetization

JEL Classification: E50, E58, E62, G18, G28, K00