CBDC and Bank Lending: The Role of Financial Frictions
35 Pages Posted: 18 Jan 2024 Last revised: 24 Jan 2024
Date Written: December 28, 2023
Abstract
We examine the impact of a Central Bank Digital Currency (CBDC) on bank lending, emphasizing the role of different financial frictions. Within a stylized general equilibrium model, we integrate a banking sector characterized by market power on deposits and leverage constraints, together with liquidity in households' utility. Calibrating the model to US data and simulating a CBDC introduction as a shift in households' preferences for public money, our results indicate that a CBDC increases bank lending when market power is the primary operating friction in the banking sector. However, this outcome reverses when leverage constraints are binding for banks.
Keywords: central bank digital currency, CBDC, bank intermediation, financial frictions, deposits, market power
JEL Classification: E42, E50, E58
Suggested Citation: Suggested Citation