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  5. The Optimal Quantity of CBDC in a Bank-Based Economy

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

The Optimal Quantity of CBDC in a Bank-Based Economy

  • Lorenzo Burlon
  • Manuel A. Muñoz
  • Frank Smets
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

We provide evidence that the effects of digital euro news on bank valuations and lending depend on the bank’s reliance on deposit funding and the design features aimed at calibrating the quantity of central bank digital currency (CBDC). Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions, the issuance of CBDC yields non-trivial welfare trade-offs between, on one side, the positive expansion of liquidity services and the improved stabilization of deposit funding and lending and, on the other side, a negative bank disintermediation effect. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The optimal amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly GDP in equilibrium.

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