Many central banks are contemplating issuing a central bank digital currency (CBDC). A CBDC would have implications for payments, banking and, more broadly, total demand and supply in the economy. Considering these effects, should the central bank issue a CBDC? And if so, should the CBDC be more like cash or bank deposits?
To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions (including cash, deposits and credit) as well as a novel feedback effect from transactions to deposit creation. We separate the general equilibrium effects of a CBDC into three channels: payment efficiency, price effects and the bank funding costs, and quantify the contribution of each channel into the aggregate effects.
We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, it can also increase bank intermediation, even in the absence of bank market power. A higher interest rate on a cash-like CBDC makes payments more efficient. This increases demand and generates positive spillovers on other types of transactions. As a result, deposit taking and lending, and thus intermediation, increase. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 5.8 percent and capture up to 25 percent of the payment market. In contrast, a deposit-like CBDC can reduce bank intermediation by up to 2.6 percent, grabbing a market share of about 16.7 percent.