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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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    3. Ozili, Peterson K, 2023. "CBDC, Fintech and cryptocurrency for financial Inclusion and financial stability," MPRA Paper 115768, University Library of Munich, Germany.
    4. Guizhou Wang & Kjell Hausken, 2022. "Competition between Variable–Supply and Fixed–Supply Currencies," Economies, MDPI, vol. 10(11), pages 1-20, October.
    5. 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).
    6. 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).
    7. Scharnowski, Stefan, 2022. "Central bank speeches and digital currency competition," Finance Research Letters, Elsevier, vol. 49(C).
    8. 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).
    9. 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.
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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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