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Central Bank Digital Currency and Balance Sheet Policy

Author

Listed:
  • Martina Fraschini

    (University of Lausanne, HEC; Swiss Finance Institute)

  • Luciano Somoza

    (University of Lausanne, HEC; Swiss Finance Institute)

  • Tammaro Terracciano

    (University of Geneva, GFRI; Swiss Finance Institute)

Abstract

This paper studies a stylized economy in which the central bank can hold either treasuries or risky securities against central bank digital currency (CBDC) deposits. The key mechanism driving the results is the reduction in bank deposits that follows the introduction of a CBDC and its impact on the banking sector. With CBDC funds invested in treasuries, the central bank channels funds back to the banking sector via open market operations and the introduction of a CBDC is neutral, consistently with the equivalence theorem of Brunnermeier and Niepelt (2019). However, it is not neutral when accounting for liquidity requirements, quantitative easing, or for CBDC deposits held against risky securities. We reach two main conclusions. First, current monetary policy regimes do matter for CBDC equilibrium effects. Second, there is a trade-off between bank lending to the economy and taxes, as holding risky assets against CBDC deposits leads to lower expected taxes and lower bank lending.

Suggested Citation

  • Martina Fraschini & Luciano Somoza & Tammaro Terracciano, 2021. "Central Bank Digital Currency and Balance Sheet Policy," Swiss Finance Institute Research Paper Series 21-25, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2125
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    Cited by:

    1. 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.
    2. Ahnert, Toni & Assenmacher, Katrin & Hoffmann, Peter & Leonello, Agnese & Monnet, Cyril & Porcellacchia, Davide, 2022. "The economics of central bank digital currency," Working Paper Series 2713, European Central Bank.

    More about this item

    Keywords

    CBDC; central banking; monetary policy; QE;
    All these keywords.

    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
    • G2 - Financial Economics - - Financial Institutions and Services

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