Assessing the Impact of Central Bank Digital Currency on Private Banks

Abstract

I investigate how an interest-bearing central bank digital currency (CBDC) can be expected to impact a monopolistic banking sector.My framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank.I …nd that the introduction of a CBDC has no detrimental e¤ect on bank lending activity and may, in some circumstances, even serve to promote it.The intervention does, however, reduce monopoly bank pro…t since it induces the monopoly bank to raise its deposit rate to retain deposits that remain a relatively cheap source of funding.More attractive deposit services have the e¤ect of increasing …nancial inclusion and decreasing the demand for currency.Available theory and evidence suggests that a properly-designed CBDC is not likely to threaten …nancial stability.

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