CBDC and Bank Lending: The Role of Financial Frictions

35 Pages Posted: 18 Jan 2024 Last revised: 24 Jan 2024

See all articles by Fernando Cirelli

Fernando Cirelli

Columbia University - School of International & Public Affairs (SIPA)

Remo Nyffenegger

Swiss National Bank; University of Basel - Faculty of Business and Economics; University of Basel - Center for Innovative Finance

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

Cirelli, Fernando and Nyffenegger, Remo, CBDC and Bank Lending: The Role of Financial Frictions (December 28, 2023). Available at SSRN: https://ssrn.com/abstract=4678281 or http://dx.doi.org/10.2139/ssrn.4678281

Fernando Cirelli

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://https://www.fernandocirelli.com

Remo Nyffenegger (Contact Author)

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

University of Basel - Faculty of Business and Economics ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://remonyffenegger.github.io/

University of Basel - Center for Innovative Finance ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://remonyffenegger.github.io/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
377
Abstract Views
1,174
Rank
164,079
PlumX Metrics