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The Optimal Quantity of CBDC in a Bank-Based Economy

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  • Lorenzo Burlon
  • Manuel A. Muñoz
  • Frank Smets

Abstract

We show that the estimated effect of digital euro news on bank stock valuations and lending depends on the bank's deposit reliance and the central bank digital currency (CBDC) design features. Using a quantitative DSGE model calibrated to the euro area economy that replicates such evidence, we find that CBDC issuance yields nontrivial welfare trade-offs between, on one side, the positive expansion of liquidity services and the improved stabilization of deposit funding and lending and, on the other side, a negative bank disintermediation effect. The optimal amount of CBDC lies between 15 and 45 percent of quarterly GDP.

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  • Lorenzo Burlon & Manuel A. Muñoz & Frank Smets, 2024. "The Optimal Quantity of CBDC in a Bank-Based Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 172-217, October.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:4:p:172-217
    DOI: 10.1257/mac.20220152
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    1. The optimal quantity of CBDC in a bank-based economy
      by Christian Zimmermann in NEP-DGE blog on 2022-10-16 16:45:20

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    Cited by:

    1. Ozili, Peterson K, 2023. "Central bank digital currency and bank earnings management using loan loss provisions," MPRA Paper 116412, University Library of Munich, Germany.
    2. Copestake, Alexander & Furceri, Davide & Gonzalez-Dominguez, Pablo, 2023. "Crypto market responses to digital asset policies," Economics Letters, Elsevier, vol. 222(C).
    3. Andrej Sokol & Michael Kumhof & Marco Pinchetti & Phurichai Rungcharoenkitkul, 2023. "CBDC policies in open economies," BIS Working Papers 1086, Bank for International Settlements.
    4. Azzone, Michele & Barucci, Emilio, 2023. "Evaluation of sight deposits and central bank digital currency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    5. Magin, Jana & Neyer, Ulrike & Stempel, Daniel, 2023. "The Macroeconomic Effects of Different CBDC Regimes in an Economy with a Heterogeneous Household Sector," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277656, Verein für Socialpolitik / German Economic Association.
    6. Assenmacher, Katrin & Bitter, Lea & Ristiniemi, Annukka, 2023. "CBDC and business cycle dynamics in a New Monetarist New Keynesian model," Working Paper Series 2811, European Central Bank.
    7. Bitter, Lea, 2020. "Banking Crises under a Central Bank Digital Currency (CBDC)," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224600, Verein für Socialpolitik / German Economic Association.
    8. Muñoz, Manuel A., 2020. "Macroprudential policy and the role of institutional investors in housing markets," Working Paper Series 2454, European Central Bank.
    9. Moro, Alessandro & Nispi Landi, Valerio, 2024. "The external financial spillovers of CBDCs," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    10. Meller, Barbara & Soons, Oscar, 2023. "Know your (holding) limits: CBDC, financial stability and central bank reliance," Occasional Paper Series 326, European Central Bank.
    11. Dionysopoulos, Lambis & Marra, Miriam & Urquhart, Andrew, 2024. "Central bank digital currencies: A critical review," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. Muñoz, Manuel A. & Soons, Oscar, 2023. "Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC," Working Paper Series 2801, European Central Bank.
    13. Nocciola, Luca & Zamora-Pérez, Alejandro, 2024. "Transactional demand for central bank digital currency," Working Paper Series 2926, European Central Bank.
    14. Alonso-Robisco, Andres & Carbó, José Manuel, 2023. "Analysis of CBDC narrative by central banks using large language models," Finance Research Letters, Elsevier, vol. 58(PC).

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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