Monetary Policy Implications Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems

43 Pages Posted: 5 Apr 2023

See all articles by Inutu Lukonga

Inutu Lukonga

International Monetary Fund (IMF)

Abstract

Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.

Keywords: Central Bank Digital Currencies, CBDC, CBDC Pilots, Monetary Policy, Islamic Finance, impact monetary policy implementation, design option, unremunerated CBDC, monetary policy implication, deposit disintermediation, Commercial banks, Velocity of money, Islamic banking, Monetary base, Global

JEL Classification: C72, C73, D40, E41, E42, E52, E58, O32, O33, G21, L86, P43, E50

Suggested Citation

Lukonga, Inutu, Monetary Policy Implications Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems. IMF Working Paper No. 2023/060, Available at SSRN: https://ssrn.com/abstract=4403780 or http://dx.doi.org/10.5089/9798400237430.001

Inutu Lukonga (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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