Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297347 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2907
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We develop a two-country DSGE model with financial frictions to study the transition from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost-free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution methods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand.
Subjects: 
Central bank digital currency
open-economy DSGE models
steady-state transition
occasionally binding constraints
JEL: 
E50
E58
F30
F41
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6387-9
Document Type: 
Working Paper

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