Central Bank Digital Currencies and Monetary Policy Effectiveness in the Euro Area

In consequence of the progressive digitalization and declining trend of cash- usage in payments, the majority of central banks is currently researching the topic of Central Bank Digital Currencies (CBDCs). Since 2020, the ECB is preparing a review into whether to issue a digital complement to physical cash and central bank deposits, the so-called digital euro. This study investigates its potential impact on the transmission of monetary policy. We fi rst survey and interpret key properties of money and money-like assets in the current monetary framework, which motivates a discussion of the proposed forms of CBDCs and the digital euro. Against this background, we extend and close the arbitrage model of Meaning et al. (2018) to investigate the effect of CBDCs on the effectiveness of monetary policy transmission and the ability of the banking sector to ful fil regulatory liquidity requirements. We conclude that monetary policy would be effective following the introduction of interest-bearing CBDCs, potentially reinforcing the mechanism. Further, we confi rm that an increase in non-pecuniary benefi ts of holding bank deposits in relation to CBDCs can mitigate the risk of a potential disintermediation of the banking sector.