A Macroeconomic Model of Central Bank Digital Currency

82 Pages Posted: 12 Apr 2024

See all articles by Pascal Paul

Pascal Paul

Federal Reserve Bank of San Francisco

Mauricio Ulate

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Jing Cynthia Wu

The University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Date Written: March 15, 2024

Abstract

We develop a quantitative New Keynesian DSGE model to study the introduction of a central bank digital currency (CBDC): government-backed digital money available to retail consumers. At the heart of our model are monopolistic banks with market power in deposit and loan markets. When a CBDC is introduced, households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed. However, deposits also flow out of the banking system and bank lending contracts. We assess this welfare trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal interest rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%.

Keywords: Central bank digital currency, Banks, DSGE, Monetary policy.

JEL Classification: E3, E4, E5, G21, G51.

Suggested Citation

Paul, Pascal and Ulate, Mauricio and Wu, Jing Cynthia, A Macroeconomic Model of Central Bank Digital Currency (March 15, 2024). Available at SSRN: https://ssrn.com/abstract=4761011 or http://dx.doi.org/10.2139/ssrn.4761011

Pascal Paul

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

HOME PAGE: http://www.pascalpaul.de/

Mauricio Ulate

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Jing Cynthia Wu (Contact Author)

The University of Illinois at Urbana-Champaign ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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