Central Bank Digital Currency: Welfare and Policy Implications

A model of banking and means of payment is constructed to analyze the effects of the introduction of central bank digital currency (CBDC). That CBDC is interest bearing is not an advantage, as replacement of physical currency with CBDC does not expand the attainable set of equilibrium allocations. CBDC can increase welfare by competing with private means of payment and shifting safe assets from the private banking sector to what is effectively a narrow banking facility. This uses the aggregate stock of safe collateral more efficiently, given incentive problems in private banking.