John Barrdear and Michael Kumhof — The macroeconomics of central bank issued digital currencies

Abstract

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Key words: Distributed ledgers, blockchain, banks, financial intermediation, bank lending, money creation, money demand, endogenous money, countercyclical policy. 

  Bank of England
Staff Working Paper No. 605: The macroeconomics of central bank issued digital currencies
John Barrdear and Michael Kumhof