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Federal Reserve Bank of Philadelphia
Working Papers
Should Central Banks Issue Digital Currency?
Todd Keister
Daniel R. Sanches

We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banksfunding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.

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Todd Keister & Daniel R. Sanches, Should Central Banks Issue Digital Currency?, Federal Reserve Bank of Philadelphia, Working Papers 19-26, 03 Jun 2019.
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Keywords: Monetary policy; liquidity premium; collateral constraint; aggregate investment; cryptocurrency
DOI: 10.21799/frbp.wp.2019.26
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