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The crowding-out effect of central bank digital currencies: A simple and generalizable payment portfolio model

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  • Bian, Wenlong
  • Ji, Yang
  • Wang, Peng

Abstract

We construct a simple and generalizable payment portfolio model to examine the potential crowding-out effect of Central Bank Digital Currencies (CBDC) on bank deposits. Specifically, economic agents choose among cash, deposits, and CBDC to maximize the utility while satisfying their basic payment needs. Our model shows that, under the certain condition, agents have demand for CBDC and reduce the holdings of cash and deposits at the same time. The issuance of CBDC is a double-edged sword: the benefit of replacing physical cash for a more efficient payment system comes at the cost of disrupting the deposit base for commercial banks.

Suggested Citation

  • Bian, Wenlong & Ji, Yang & Wang, Peng, 2021. "The crowding-out effect of central bank digital currencies: A simple and generalizable payment portfolio model," Finance Research Letters, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:finlet:v:43:y:2021:i:c:s154461232100091x
    DOI: 10.1016/j.frl.2021.102010
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    Cited by:

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    2. Wang, Yi-Ran & Ma, Chao-Qun & Ren, Yi-Shuai, 2022. "A model for CBDC audits based on blockchain technology: Learning from the DCEP," Research in International Business and Finance, Elsevier, vol. 63(C).
    3. Borgonovo, Emanuele & Caselli, Stefano & Cillo, Alessandra & Masciandaro, Donato & Rabitti, Giovanni, 2021. "Money, privacy, anonymity: What do experiments tell us?," Journal of Financial Stability, Elsevier, vol. 56(C).
    4. Jabbar, Abdul & Geebren, Ahmed & Hussain, Zahid & Dani, Samir & Ul-Durar, Shajara, 2023. "Investigating individual privacy within CBDC: A privacy calculus perspective," Research in International Business and Finance, Elsevier, vol. 64(C).
    5. Yousaf, Imran & Goodell, John W., 2023. "Linkages between CBDC and cryptocurrency uncertainties, and digital payment stocks," Finance Research Letters, Elsevier, vol. 54(C).
    6. Santhoshi Gondesi & Kameswari Jada & Ramesh Palisetty & Veena Ishwarappa Bhavikatti & Omnamasivaya Boddeda & Chaitanya Gorli & Tejaswini Bastray & Sony Hiremath, 2024. "Digital currency: an empirical study analyzing its effectiveness in the banking sector," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 15(11), pages 5182-5195, November.
    7. He, Hui & Shi, Wei, 2023. "Enterprise litigation risk and enterprise performance," Finance Research Letters, Elsevier, vol. 55(PA).
    8. Ozili, Peterson K, 2023. "CBDC, Fintech and cryptocurrency for financial Inclusion and financial stability," MPRA Paper 115768, University Library of Munich, Germany.
    9. Guizhou Wang & Kjell Hausken, 2022. "Competition between Variable–Supply and Fixed–Supply Currencies," Economies, MDPI, vol. 10(11), pages 1-20, October.
    10. Scharnowski, Stefan, 2022. "Central bank speeches and digital currency competition," Finance Research Letters, Elsevier, vol. 49(C).
    11. Jaemin Son & Mehmet Huseyin Bilgin & Doojin Ryu, 2022. "Consumer choices under new payment methods," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-22, December.
    12. Bhaskar, Ratikant & Hunjra, Ahmed Imran & Bansal, Shashank & Pandey, Dharen Kumar, 2022. "Central Bank Digital Currencies: Agendas for future research," Research in International Business and Finance, Elsevier, vol. 62(C).
    13. Bao, Fengnai & Chen, Binger & Chen, Di, 2024. "The impact of local government financing vehicles debt on corporate risk-taking: Evidence from China," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    CBDC; Payment portfolio model; Crowding-out effect;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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