Central Bank Digital Currency and Balance Sheet Policy

Abstract

This paper studies how the introduction of a central bank digital currency (CBDC) interacts with ongoing monetary policies. We distinguish two kind of policies: standard policy, where the central bank invests in treasuries, and quantitative easing, where the central bank invests in risky securities. In each scenario, we introduce an interest-bearing CBDC, and study the equilibrium allocations. Our analysis reaches three main conclusions. The first is that the equilibrium impact of a CBDC depends on the ongoing monetary policy. Second, when the central bank conducts quantitative easing, the introduction of a CBDC is neutral under two conditions: the cost of issuing a CBDC is equal to the interest on reserves, and the demand for CBDC deposits is smaller than the amount of excess reserves in the system. Third, the introduction of a CBDC might render quantitative easing a quasi-permanent policy, as commercial banks optimally use their excess reserves to accommodate retailers’ demand for switching from bank deposits to CBDC deposits.