Abstract
We build models with an interest-bearing central bank digital currency (CBDC) to investigate the impacts of issuing CBDC on banking and the macroeconomy. When CBDC is the only asset, a higher interest rate on CBDC does not necessarily lead to financial disintermediation. It could promote bank lending and firm investment because CBDC and bank deposits are complements. The interest rate on reserves and the required reserve ratio can affect bank lending and investment when the reserve constraint binds. In our extensions, cash and interest-bearing CBDC can coexist, where the coexistence may require the central bank to adjust either the CBDC interest rate or the interest rate on reserves. Our results suggest that the design of CBDC and banking matters for understanding how CBDC affects the macroeconomy.
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