IDEAS home Printed from https://ideas.repec.org/p/srk/srkwps/2024146.html
   My bibliography  Save this paper

Public money as a store of value, heterogeneous beliefs and banks: implications of CBDC

Author

Listed:
  • Muñoz, Manuel A.
  • Soons, Oscar

Abstract

The bulk of cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty and only a fraction of the population choosing to hoard cash. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Only consumers who are sufficiently pessimistic about bank stability hold cash. The introduction of a central bank digital currency (CBDC) as a store of value lowers the storage cost of public money and induces partial bank disintermediation, which is nevertheless mitigated by an increase in relative maturity transformation. This has heterogeneous welfare consequences across the population. While cash holders always benefit by switching to CBDC, each of all other consumers may be better off or not depending on the probability of a bank run, her (and all others’) belief about such probability and the degree of technological superiority of CBDC. JEL Classification: E41, E58, G11, G21

Suggested Citation

  • Muñoz, Manuel A. & Soons, Oscar, 2024. "Public money as a store of value, heterogeneous beliefs and banks: implications of CBDC," ESRB Working Paper Series 146, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2024146
    as

    Download full text from publisher

    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp146.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1753-1797.
    2. Meller, Barbara & Soons, Oscar, 2023. "Know your (holding) limits: CBDC, financial stability and central bank reliance," Occasional Paper Series 326, European Central Bank.
    3. Barbara Meller & Oscar Soons, 2023. "Know your (holding) limits: CBDC, financial stability and central bank reliance," Working Papers 771, DNB.
    4. 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.
    5. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1493-1566.
    6. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    7. Assenmacher, Katrin & Berentsen, Aleksander & Brand, Claus & Lamersdorf, Nora, 2021. "A unified framework for CBDC design: remuneration, collateral haircuts and quantity constraints," Working Paper Series 2578, European Central Bank.
    8. Katrin Assenmacher & Franz Seitz & Jörn Tenhofen, 2019. "The demand for Swiss banknotes: some new evidence," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-22, December.
    Full references (including those not matched with items on IDEAS)

    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. Muñoz, Manuel A. & Soons, Oscar, 2023. "Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC," Working Paper Series 2801, European Central Bank.
    2. Caccia, Enea & Tapking, Jens & Vlassopoulos, Thomas, 2024. "Central bank digital currency and monetary policy implementation," Occasional Paper Series 345, European Central Bank.
    3. Philippe Bacchetta & Elena Perazzi, 2021. "CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective," Swiss Finance Institute Research Paper Series 21-81, Swiss Finance Institute.
    4. Eduardo Dávila & Ansgar Walther, 2023. "Prudential Policy with Distorted Beliefs," American Economic Review, American Economic Association, vol. 113(7), pages 1967-2006, July.
    5. 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.
    6. Charles M. Kahn & Maarten R.C. van Oordt, 2022. "The Demand for Programmable Payments," Tinbergen Institute Discussion Papers 22-076/IV, Tinbergen Institute.
    7. Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
    8. Lambert, Claudia & Meller, Barbara & Pancaro, Cosimo & Pellicani, Antonella & Radulova, Petya & Soons, Oscar & van der Kraaij, Anton, 2024. "Digital euro safeguards – protecting financial stability and liquidity in the banking sector," Occasional Paper Series 346, European Central Bank.
    9. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.
    10. Moro, Alessandro & Nispi Landi, Valerio, 2024. "The external financial spillovers of CBDCs," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    11. Ozili, Peterson K, 2023. "Central bank digital currency and bank earnings management using loan loss provisions," MPRA Paper 116412, University Library of Munich, Germany.
    12. Bindseil, Ulrich & Marrazzo, Marco & Sauer, Stephan, 2024. "The impact of central bank digital currency on central bank profitability, risk-taking and capital," Occasional Paper Series 360, European Central Bank.
    13. Simone Auer & Nicola Branzoli & Giuseppe Ferrero & Antonio Ilari & Francesco Palazzo & Edoardo Rainone, 2024. "CBDC and the banking system," Questioni di Economia e Finanza (Occasional Papers) 829, Bank of Italy, Economic Research and International Relations Area.
    14. 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.
    15. Cyril Monnet & Hyun Song Shin & Jon Frost & Leonardo Gambacorta & Raphael Auer & Tara Rice, 2022. "Central Bank Digital Currencies: Motives, Economic Implications, and the Research Frontier," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 697-721, August.
    16. Nikolay Hristov & Markus Roth, 2019. "Uncertainty Shocks and Financial Crisis Indicators," CESifo Working Paper Series 7839, CESifo.
    17. Bonciani, Dario, 2015. "Estimating the effects of uncertainty over the business cycle," MPRA Paper 65921, University Library of Munich, Germany.
    18. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    19. Idriss Fontaine, 2021. "Uncertainty and Labour Force Participation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(2), pages 437-471, April.
    20. Salzmann, Leonard, 2020. "The Impact of Uncertainty and Financial Shocks in Recessions and Booms," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224588, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    bank stability; cash hoarding; central bank digital currency; disagreement; uncertainty shocks; welfare; flight-to-safety;
    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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    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:srk:srkwps:2024146. 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: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/esrbede.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.