IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/21-10.html
   My bibliography  Save this paper

Monetary Policy Pass-Through with Central Bank Digital Currency

Author

Listed:
  • Janet Hua
  • Yu Zhu

Abstract

This paper investigates how the introduction of an interest-bearing central bank digital currency (CBDC) that serves as a perfect substitute for bank deposits as an electronic means of payment affects monetary policy pass-through. When the deposit market is not fully competitive, the CBDC tends to weaken the pass-through of the interest on reserves. The interest on CBDC impacts the deposit market more directly compared with the interest on reserves. The CBDC rate can also have stronger pass-through to the loan market; however, the effect can be dampened by the policy on the interest on reserves. Therefore, coordination between the two policy rates is needed to effectively achieve policy goals.

Suggested Citation

  • Janet Hua & Yu Zhu, 2021. "Monetary Policy Pass-Through with Central Bank Digital Currency," Staff Working Papers 21-10, Bank of Canada.
    • Handle: RePEc:bca:bocawp:21-10
    as

    Download full text from publisher

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2021/03/swp2021-10.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Schilling, Linda & Uhlig, Harald, 2019. "Some simple bitcoin economics," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 16-26.
    2. James Chapman & Carolyn A. Wilkins, 2019. "Crypto ‘Money’: Perspective of a Couple of Canadian Central Bankers," Discussion Papers 2019-1, Bank of Canada.
    3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    4. Aleksander Berentsen & Fabian Schär, 2018. "The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies," Review, Federal Reserve Bank of St. Louis, vol. 100(2), pages 97-106.
    5. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    6. Yu Zhu & Scott Hendry, 2019. "A Framework for Analyzing Monetary Policy in an Economy with E-money," Staff Working Papers 19-1, Bank of Canada.
    7. Seyed Mohammadreza Davoodalhosseini & Francisco Rivadeneyra, 2020. "A Policy Framework for E-Money," Canadian Public Policy, University of Toronto Press, vol. 46(1), pages 94-106, March.
    8. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    9. Kurlat, Pablo, 2019. "Deposit spreads and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 78-93.
    10. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
    11. Brunnermeier, Markus K. & Niepelt, Dirk, 2019. "On the equivalence of private and public money," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 27-41.
    12. Jonathan Chiu & Tsz-Nga Wong, 2015. "On the Essentiality of E-Money," Staff Working Papers 15-43, Bank of Canada.
    13. Ruchir Agarwal & Miles Kimball, 2015. "Breaking Through the Zero Lower Bound," IMF Working Papers 2015/224, International Monetary Fund.
    14. Davoodalhosseini, Seyed Mohammadreza, 2022. "Central bank digital currency and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    15. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
    16. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
    17. Yifei Wang & Toni M. Whited & Yufeng Wu & Kairong Xiao, 2022. "Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 77(4), pages 2093-2141, August.
    18. Jonathan Chiu & Janet Hua Jiang & Seyed Mohammadreza Davoodalhosseini & Yu Zhu, 2019. "Central Bank Digital Currency and Banking," 2019 Meeting Papers 862, Society for Economic Dynamics.
    19. Michael D. Bordo & Andrew T. Levin, 2017. "Central Bank Digital Currency and the Future of Monetary Policy," NBER Working Papers 23711, National Bureau of Economic Research, Inc.
    20. Christopher Henry & Kim Huynh & Angelika Welte, 2018. "2017 Methods-of-Payment Survey Report," Discussion Papers 18-17, Bank of Canada.
    21. Walter Engert & Ben Fung, 2017. "Central Bank Digital Currency: Motivations and Implications," Discussion Papers 17-16, Bank of Canada.
    22. Meaning, Jack & Dyson, Ben & Barker, James & Clayton, Emily, 2018. "Broadening narrow money: monetary policy with a central bank digital currency," Bank of England working papers 724, Bank of England.
    23. Kevin Foster & Scott Schuh & Hanbing Zhang, 2013. "The 2010 Survey of Consumer Payment Choice," Research Data Report 13-2, Federal Reserve Bank of Boston.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charles M. Kahn & Maarten R.C. van Oordt, 2022. "The Demand for Programmable Payments," Tinbergen Institute Discussion Papers 22-076/IV, Tinbergen Institute.
    2. Agur, Itai & Ari, Anil & Dell’Ariccia, Giovanni, 2022. "Designing central bank digital currencies," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 62-79.
    3. repec:ecb:ecbdps:202220 is not listed on IDEAS
    4. Toni Ahner & Katrin Assenmacher & Peter Hoffmann & Agnese Leonello & Cyril Monnet & Davide Porcellacchia, 2024. "The Economics of Central Bank Digital Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 20(4), pages 221-274, October.
    5. Charles M. Kahn & Maarten van Oordt & Yu Zhu, 2021. "Best Before? Expiring Central Bank Digital Currency and Loss Recovery," Staff Working Papers 21-67, Bank of Canada.
    6. Ferry Syarifuddin & Toni Bakhtiar, 2021. "Monetary Policy Strategy In The Presence Of Central Bank Digital Currency," Working Papers WP/09/2021, Bank Indonesia.
    7. Jonathan Chiu & Mohammad Davoodalhosseini, 2021. "Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design," Staff Working Papers 21-63, Bank of Canada.
    8. Li, Jiaqi, 2023. "Predicting the demand for central bank digital currency: A structural analysis with survey data," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 73-85.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Davoodalhosseini, Seyed Mohammadreza, 2022. "Central bank digital currency and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    2. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    3. Agur, Itai & Ari, Anil & Dell’Ariccia, Giovanni, 2022. "Designing central bank digital currencies," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 62-79.
    4. Alexandra Mitschke, 2021. "Central Bank Digital Currencies and Monetary Policy Effectiveness in the Euro Area," Working Papers Dissertations 74, Paderborn University, Faculty of Business Administration and Economics.
    5. Dionysopoulos, Lambis & Marra, Miriam & Urquhart, Andrew, 2024. "Central bank digital currencies: A critical review," International Review of Financial Analysis, Elsevier, vol. 91(C).
    6. Li, Jiaqi, 2023. "Predicting the demand for central bank digital currency: A structural analysis with survey data," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 73-85.
    7. Jonathan Chiu & Janet Hua Jiang & Seyed Mohammadreza Davoodalhosseini & Yu Zhu, 2019. "Central Bank Digital Currency and Banking," 2019 Meeting Papers 862, Society for Economic Dynamics.
    8. Rehman, Mubeen Abdur & Irfan, Muhammad & Naeem, Muhammad Abubakr & Lucey, Brian M. & Karim, Sitara, 2023. "Macro-financial implications of central bank digital currencies," Research in International Business and Finance, Elsevier, vol. 64(C).
    9. Beniak, Patrycja, 2019. "Central bank digital currency and monetary policy: a literature review," MPRA Paper 96663, University Library of Munich, Germany.
    10. Hossein Nabilou, 2020. "Testing the waters of the Rubicon: the European Central Bank and central bank digital currencies," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 299-314, December.
    11. Ohik Kwon & Seungduck Lee & Jaevin Park, 2020. "Central Bank Digital Currency, Tax Evasion, Inflation Tax, and Central Bank Independence," Working Papers 2020-26, Economic Research Institute, Bank of Korea.
    12. Lim, King Yoong & Liu, Chunping & Zhang, Shuonan, 2024. "Optimal central banking policies: Envisioning the post-digital yuan economy with loan prime rate-setting," Emerging Markets Review, Elsevier, vol. 59(C).
    13. Williamson, Stephen D., 2022. "Central bank digital currency and flight to safety," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    14. Marcelo A. T. Aragão, 2021. "A Few Things You Wanted to Know about the Economics of CBDCs, but were Afraid to Model: a survey of what we can learn from who has done," Working Papers Series 554, Central Bank of Brazil, Research Department.
    15. Theodore Pelagidis & Eleftheria Kostika, 2022. "Investigating the role of central banks in the interconnection between financial markets and cryptoassets," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 481-507, September.
    16. Ohik Kwon & Seungduck Lee & Jaevin Park, 2022. "Central bank digital currency, tax evasion, and inflation tax," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1497-1519, October.
    17. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2020. "Safe Payments," Staff Working Papers 20-53, Bank of Canada.
    18. Todd Keister & Daniel Sanches, 2023. "Should Central Banks Issue Digital Currency?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(1), pages 404-431.
    19. Thitima Chucherd & Chanokkarn Mek-yong & Nalin Nookhwun & Passawuth Nuntnarumit & Natta Piyakarnchana & Suparit Suwanik, 2021. "Monetary and Financial Perspectives on Retail CBDC in the Thai Context," PIER Discussion Papers 152, Puey Ungphakorn Institute for Economic Research.
    20. Schilling, Linda & Fernández-Villaverde, Jesús & Uhlig, Harald, 2024. "Central bank digital currency: When price and bank stability collide," Journal of Monetary Economics, Elsevier, vol. 145(C).

    More about this item

    Keywords

    Digital currencies and fintech; Monetary policy transmission;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:21-10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.