Central bank digital currency and monetary policy

Many central banks are contemplating whether to issue a central bank digital currency (CBDC). A CBDC has certain potential benefits, including the possibility that it can bear interest. However, using a CBDC is costly for agents. I study the optimal monetary policy when only cash, only a CBDC, or both cash and a CBDC are available to agents. If the cost of using a CBDC is not too high, more efficient allocations can be implemented by using a CBDC than using cash, and the first best can be achieved. Having both cash and a CBDC available may result in lower welfare than in the cases where only cash or only a CBDC is available. The welfare gains of introducing a CBDC are estimated under various scenarios for the United States and Canada. For example, if the cost of using a CBDC relative to cash is around 0.25% of the transaction value, introducing a CBDC can lead to an increase of 0.12-0.21% consumption for the United States and 0.04-0.07% for Canada. (C) 2021 Elsevier B.V. All rights reserved.

Automated summary

This study examines the impact of central bank digital currency (CBDC) on monetary policy and finds that using CBDC can achieve more efficient resource allocation and improve welfare levels, provided that the cost is manageable. However, the coexistence of cash and CBDC may lower welfare levels.