Impact of CBDC design choices on transmission of monetary policy
CBDC design choices have an impact on the transmission of monetary policy.?The transmission of monetary policy can be strengthened by a CBDC with a sufficiently high convenience value.
Recently BIS published a working paper that mainly focuses on the United States monetary system. It studies the relationship between central bank digital currencies (CBDCs) that facilitates payments and the rate of interest on reserves (IOR) that affect deposit rates. The central banks are working more on country-specific design and policy interactions.
The United States monetary system is characterized by significant excess reserves. Bank uses IOR on reserves as a means to induce monetary policy in the system.
The implementation of a CBDC may change the competitive advantage that the large banks get which depends on the design they choose. Improving payment convenience has positive implications on market composition as well. Paying interest on CBDC accounts raises deposit rates. The market shares can become unequal and thereby don’t allow deposit prices to move slowly for changes in IOR rates. A highly practical CBDC increases the responsiveness of deposit rates to changes in IOR rates and creates enough competitive pressure in the deposit markets to drive deposit rates higher for any given level of IOR.?
Different-sized banks react differently to IOR policy. The BIS team investigate the effects of two design features which are convenience value and interest rate. Currencies possess these features as "stores of value" and "mediums of exchange". The deposit rates rise when the CBDC interest rate is raised but this also results in higher market share disparities between the deposit and lending markets and can make deposit prices less responsive to changes in the IOR rate. CBDC interest rate increases may enhance monetary policy pass through but will negatively impact market composition. The transmission of monetary policy can be strengthened by a CBDC with a sufficiently high convenience value.
CBW - External Analyst
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