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Assessing the Impact of Central Bank Digital Currency on Private Banks

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  • David Andolfatto

Abstract

This paper investigates how a central bank digital currency can be expected to impact a monopolistic banking sector. The paper’s framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. The paper finds that the introduction of a central bank digital currency has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly designed central bank digital currency is not likely to threaten financial stability.

Suggested Citation

  • David Andolfatto, 2021. "Assessing the Impact of Central Bank Digital Currency on Private Banks," The Economic Journal, Royal Economic Society, vol. 131(634), pages 525-540.
    • Handle: RePEc:oup:econjl:v:131:y:2021:i:634:p:525-540.
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    File URL: http://hdl.handle.net/10.1093/ej/ueaa073
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    References listed on IDEAS

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    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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