Working Paper Revision
Assessing the Impact of Central Bank Digital Currency on Private Banks
Abstract: I investigate how a central bank digital currency (CBDC) can be expected to impact a monopolistic banking sector. My framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. I find that the introduction of a CBDC has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly-designed CBDC is not likely to threaten financial stability.
Keywords: Digital Currency; Central Banks; Monopoly; Markups;
https://doi.org/10.20955/wp.2018.026
Status: Forthcoming in Economic Journal
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Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2020-04-22
Number: 2018-026
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- Working Paper Revision (2020-04-22) : You are here.
- Working Paper Original (2018-10-05) : Assessing the Impact of Central Bank Digital Currency on Private Banks