Title : Central Bank Digital Currency, Real Effect and Welfare

Author : Seonghoon Cho(Yonsei University)

This article complements a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model with central bank digital currency (CBDC) in which private banks issue two types of deposit: debit and (interest-bearing) deposit. These two instruments are used as liquidity and an asset to households, respectively. Our setup makes clear that CBDC directly competes with traditional money: physical cash and debit, but indirectly with deposit. Introduction of CBDC can have a significant effect on the optimal debit balance in equilibrium. The magnitude and direction in changes in households’ debit holding critically hinge on the households’ preference for holding CBDC, elasticity of substitutions among cash, debit and CBDC, the potentially non-zero CBDC interest rate, and the optimal response of banks. However, the interest-bearing deposit moves in the opposite direction, offsetting the changes in debit, thus the total bank liabilities and loan are barely affected in the economy with CBDC. This implies that the efficacy of CBDC on output and welfare, if any, is quantitatively only marginal, relative to the findings in the previous studies with only one type of deposit.