The Effects of CBDC on the Federal Reserve's Balance Sheet

Abstract

We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve's balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve's balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet to accommodate CBDC issuance.