Abstract
This study examines how the issuance of a central bank digital currency (CBDC) affects consumers' payment instrument choices, asset allocation decisions, and the profitability of financial intermediaries. Specifically, we advance a theoretical model in which introducing an interest-bearing CBDC expands market participants' payment and investment options but also poses a potential threat to financial intermediaries if it raises their borrowing costs significantly. The existence of a network externality further complicates the analysis by affecting consumers' choice of payment mechanism. Our results suggest that the issuance of a CBDC is a double-edged sword for an economy. Although it provides additional payment and investment options for market participants, it increases competition and weakens financial intermediaries' margins.
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