Money and Banking with Reserves and CBDC

We analyze retail central bank digital currency (CBDC) in a two-tier monetary system with bank deposit market power and externalities from liquidity transformation. Resource costs of liquidity provision determine the optimal monetary architecture and modified Friedman (1969) rules the optimal monetary policy. Optimal interest rates on reserves and CBDC differ. A calibration for the U.S. suggests a weak case for CBDC in the baseline but a much clearer case when too-big-to-fail banks, tax distortions or instrument restrictions are present. Depending on central bank choices CBDC raises U.S. bank funding costs by up to 1.5 percent of GDP. JEL codes: E42, E43, E51, E52, G21, G28

[1]  Stephen D. Williamson.  Central Bank Digital Currency: Welfare and Policy Implications , 2022, Journal of Political Economy.

[2]  Markus K. Brunnermeier,et al.  Debt as Safe Asset , 2022 .

[3]  Rodney Garratt,et al.  On Interest-Bearing Central Bank Digital Currency with Heterogeneous Banks , 2021, SSRN Electronic Journal.

[4]  Michael Kumhof,et al.  Central bank digital currencies — Design principles for financial stability , 2021 .

[5]  John Barrdear,et al.  The macroeconomics of central bank digital currencies , 2021 .

[6]  Emre Ozdenoren,et al.  Safe Assets as Balance Sheet Multipliers , 2021 .

[7]  George G. Pennacchi,et al.  How should governments create liquidity? , 2021 .

[8]  Codruta Boar,et al.  Ready, steady, go? - Results of the third BIS survey on central bank digital currency , 2021 .

[9]  Rodney Garratt,et al.  Monetizing Privacy , 2021 .

[10]  P. Bolton,et al.  Dynamic Banking and the Value of Deposits , 2020, SSRN Electronic Journal.

[11]  Dirk Niepelt.  Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics , 2020, SSRN Electronic Journal.

[12]  Livio Stracca,et al.  Central Bank Digital Currency in an Open Economy , 2020, SSRN Electronic Journal.

[13]  H. Gersbach,et al.  Monetary Policy with a Central Bank Digital Currency: The Short and the Long Term , 2020 .

[14]  Sebastian Di Tella,et al.  Risk Premia and the Real Effects of Money , 2020, American Economic Review.

[15]  H. Uhlig,et al.  Central Bank Digital Currency: When Price and Bank Stability Collide , 2020, SSRN Electronic Journal.

[16]  Rainer Böhme,et al.  The Technology of Retail Central Bank Digital Currency , 2020 .

[17]  Shengxing Zhang,et al.  The Limits of Onetary Economics: On Money as a Latent Medium of Exchange , 2020 .

[18]  U. Bindseil.  Tiered CBDC and the Financial System , 2020, SSRN Electronic Journal.

[19]  M. Ulate.  Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates , 2019, American Economic Review.

[20]  Harald Uhlig,et al.  Cryptocurrencies, Currency Competition and the Impossible Trinity , 2019, SSRN Electronic Journal.

[21]  Ludwig Straub,et al.  Using the Sequence-Space Jacobian to Solve and Estimate Heterogeneous-Agent Models , 2019, Econometrica.

[22]  Rodney Garratt,et al.  Privacy as a Public Good: A Case for Electronic Cash , 2019, Journal of Political Economy.

[23]  Lewis Sun,et al.  Central Bank digital currencies , 2019, Bankarstvo.

[24]  Markus K. Brunnermeier,et al.  On the Equivalence of Private and Public Money , 2019, Journal of Monetary Economics.

[25]  Daniel Sanches,et al.  Should Central Banks Issue Digital Currency? , 2019, Working paper (Federal Reserve Bank of Philadelphia).

[26]  Jonathan Chiu,et al.  Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment , 2019, Journal of Political Economy.

[27]  Juliane Begenau.  Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model , 2019, Journal of Financial Economics.

[28]  Pablo Kurlat.  Deposit Spreads and the Welfare Cost of Inflation , 2018, Journal of Monetary Economics.

[29]  Toni M. Whited,et al.  Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation , 2018, The Journal of Finance.

[30]  Francisco Rivadeneyra,et al.  Should the Central Bank Issue E-money? , 2018, The Journal of Financial Market Infrastructures.

[31]  D. Andolfatto.  Assessing the Impact of Central Bank Digital Currency on Private Banks , 2018, The Economic Journal.

[32]  H. Gersbach,et al.  Money Creation in Different Architectures , 2018 .

[33]  Dirk Niepelt.  Reserves for All? Central Bank Digital Currency, Deposits, and Their (Non)-Equivalence , 2018, SSRN Electronic Journal.

[34]  I. Drechsler,et al.  Banking on Deposits: Maturity Transformation Without Interest Rate Risk , 2018, The Journal of Finance.

[35]  A. Krishnamurthy,et al.  Intermediary Asset Pricing and the Financial Crisis , 2018, Annual Review of Financial Economics.

[36]  Christine A. Parlour,et al.  Payment System Externalities , 2017, The Journal of Finance.

[37]  Andrew T. Levin,et al.  NBER WORKING PAPER SERIES CENTRAL BANK DIGITAL CURRENCY AND THE FUTURE OF MONETARY POLICY , 2017 .

[38]  J. A. Divino,et al.  Failure of the Ricardian Equivalence Theory in Economies with Incomplete Markets , 2017 .

[39]  I. Drechsler,et al.  The Deposits Channel of Monetary Policy , 2016 .

[40]  M. King.  The End of Alchemy: Money, Banking, and the Future of the Global Economy , 2016 .

[41]  R. Lucas,et al.  On the stability of money demand , 2015 .

[42]  Javier Bianchi,et al.  Banks, Liquidity Management and Monetary Policy , 2014 .

[43]  Christopher Phelan,et al.  On the social usefulness of fractional reserve banking , 2014 .

[44]  S. Nagel.  The Liquidity Premium of Near-Money Assets , 2014 .

[45]  R. Vishny,et al.  Banks as Patient Fixed Income Investors , 2014 .

[46]  J. Mitchell.  The social and private costs of retail payment instruments: a European perspective , 2013 .

[47]  H. Schmiedel,et al.  The Social and Private Costs of Retail Payment Instruments: A European Perspective , 2012, SSRN Electronic Journal.

[48]  Michael Kumhof,et al.  The Chicago Plan Revisited , 2012, SSRN Electronic Journal.

[49]  A. Krishnamurthy,et al.  The Aggregate Demand for Treasury Debt , 2012, Journal of Political Economy.

[50]  John. Moore,et al.  Liquidity, Business Cycles, and Monetary Policy , 2012, Journal of Political Economy.

[51]  Michael Woodford,et al.  Interest and Prices , 2011 .

[52]  Thomas Philippon.  Has the U.S. Finance Industry Become Less Efficient? on the Theory and Measurement of Financial Intermediation , 2011 .

[53]  Raghuram G. Rajan,et al.  Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes , 2011 .

[54]  J. Stein.  Monetary Policy as Financial-Stability Regulation , 2011 .

[55]  A. Shleifer,et al.  Fire Sales in Finance and Macroeconomics , 2010 .

[56]  W. Buiter.  Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound , 2009 .

[57]  M. Woodford,et al.  Credit Frictions and Optimal Monetary Policy , 2008 .

[58]  S. V. D. Heuvel,et al.  The Welfare Cost of Bank Capital Requirements , 2008 .

[59]  James B. Bullard,et al.  Learning about monetary policy rules , 2002 .

[60]  M. Woodford.  Fiscal Requirements for Price Stability , 2001 .

[61]  John B. Taylor,et al.  An Historical Analysis of Monetary Policy Rules , 1998 .

[62]  R. King,et al.  The New Neoclassical Synthesis and the Role of Monetary Policy , 1997, NBER Macroeconomics Annual.

[63]  Tack Yun,et al.  Nominal price rigidity, money supply endogeneity, and business cycles , 1996 .

[64]  R. King,et al.  Inflation Targeting in a St. Louis Model of the 21st Century , 1996 .

[65]  D. Croushore,et al.  Money in the utility function: Functional equivalence to a shopping-time model , 1993 .

[66]  C. Yip,et al.  Alternative Approaches to Money and Growth , 1992 .

[67]  Andrei Shleifer,et al.  Liquidation Values and Debt Capacity: A Market Equilibrium Approach , 1992 .

[68]  B. Bernanke,et al.  Credit, Money, and Aggregate Demand , 1988 .

[69]  D. Ryan,et al.  Dynamic Macroeconomic Theory , 1988 .

[70]  Robert C. Feenstra,et al.  Functional equivalence between liquidity costs and the utility of money , 1986 .

[71]  Neil Wallace,et al.  A Modigliani-Miller Theorem for Open-Market Operations , 1981 .

[72]  James A. Fellows,et al.  A Theory of the Banking Firm , 1978 .

[73]  R. Barro.  Are Government Bonds Net Wealth? , 1974, Journal of Political Economy.

[74]  T. R. Saving.  Transactions Costs and the Demand for Money , 1972 .

[75]  Milton Friedman,et al.  The Optimum Quantity of Money''in The Optimum Quantity of Money and other essays , 1969 .

[76]  J. Tobin.  A General Equilibrium Approach to Monetary Theory , 1969 .

[77]  A. Lerner,et al.  Money in a Theory of Finance. , 1960 .

[78]  Javier Bianchi,et al.  Banks, Liquidity Management, and Monetary Policy , 2022, Econometrica.

[79]  F. Smets,et al.  The Optimal Quantity of CBDC in a Bank-Based Economy , 2022, SSRN Electronic Journal.

[80]  Monika Piazzesi,et al.  Credit lines, bank deposits or CBDC? Competition & efficiency in modern payment systems * , 2020 .

[81]  S. V. D. Heuvel,et al.  The Welfare Effects of Bank Liquidity and Capital Requirements , 2019 .

[82]  Quentin Vandeweyer.  Treasury Debt and the Pricing of Short-Term Assets CLICK HERE FOR LATEST VERSION , 2019 .

[83]  M. Gertler,et al.  A model of unconventional monetary policy , 2011 .

[84]  Antti Ripatti.  MONETARY POLICY, INFLATION AND THE BUSINESS CYCLE , 2010 .

[85]  WORKING PAPER SERIESFEDERAL RESERVE BANK of ATLANTA WORKING PAPER SERIES Money Is Privacy , 2004 .

[86]  D. Humphrey,et al.  The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals , 1993 .

[87]  Daniel E. Sichel,et al.  The demand for money , 1990 .

[88]  B. Mccallum,et al.  Demand for Money: Theoretical Studies , 1989 .

[89]  Christophe Chamley,et al.  Assets, General Equilibrium and the Neutrality of Money , 1984 .

[90]  John B. Bryant.  Government Irrelevance Results: A Simple Exposition , 1983 .

[91]  James Tobin,et al.  Commercial Banks as Creators of 'Money' , 1963 .

[92]  Merton H. Miller.  The Cost of Capital, Corporation Finance and the Theory of Investment , 1958 .

[93]  Response to “Money and Payments: The U.S. Dollar in the Age of Digital Transformation” , 2022 .